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Abstract

The Bearish Sentiment Index—the ratio of the number of investment advisers who are bearish to the total number of advisers who are either bearish or bullish—is promoted as a contrary indicator. That is, one should buy when investment advisers are bearish and sell when they are bullish. But is the Bearish Sentiment Index useful?

Examination of the data from January 1963 (when the index was first compiled) to September 1985 indicates that the index is useless as an indicator of forthcoming stock price changes. The number of correct forecasts by the index is equaled by the number of incorrect forecasts.

If the Bearish Sentiment Index is useless, why do people continue to usè it? The persistence of the belief in the usefulness of the index results from errors in cognition that lead people to see patterns in random data and to neglect evidence that runs counter to their beliefs.

About the Author(s)

Michael E. Solt
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Meir Statman PhD

Meir Statman is the Glenn Klimek Professor of Finance at Santa Clara University. His research focuses on behavioral finance, and he attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets. Dr. Statman consults with many investment companies and presents his work to academics and professionals in many forums in the United States and abroad. His most recent book is Finance for Normal People: How Investors and Markets Behave. Dr. Statman’s research has been published in numerous journals, including the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, the Journal of Financial and Quantitative Analysis, the Financial Analysts Journal, the Journal of Portfolio Management, and more. He is a member of the advisory board of several academic journals and is an associate editor of the Journal of Behavioral Finance and the Journal of Investment Management. Dr. Statman is a recipient of a Batterymarch Fellowship, a William F. Sharpe Best Paper Award, a Bernstein Fabozzi/Jacobs Levy Outstanding Article Award, a Moskowitz Prize for best paper on socially responsible investing, a Matthew R. McArthur Industry Pioneer Award, three Baker IMCA Journal Awards, and three Graham and Dodd Awards. He was named as one of the 25 most influential people by Investment Advisor. Dr. Statman received a BA and MBA from the Hebrew University of Jerusalem and a PhD from Columbia University.