When mood meets markets
Wall Street trusts numbers, but a new University of Texas at Arlington study suggests the real story lies in the people interpreting them.
Sima Jannati, assistant professor of finance at UT Arlington’s College of Business, recently published research that sheds new light on the link between emotional states and financial decision-making. Working with her coauthors, Dr. Jannati found that analysts experiencing higher levels of non-severe, or mild, depression were more likely to produce accurate earnings forecasts.
Jannati said the team’s motivation grew from earlier psychological studies showing how mood can shape judgment.
“My coauthors and I were motivated by longstanding evidence in psychology showing that mild or persistent depression can reduce overly positive biases and lead individuals to think more cautiously,” Jannati said. “Since optimism bias is a major source of forecasting errors in finance, we wanted to test whether this mechanism could help explain variation in forecast quality in a real financial setting.”
Optimism bias refers to the tendency to overestimate positive outcomes and underestimate risks. In financial forecasting, this bias can lead analysts to issue projections that are unrealistically high or incomplete, ultimately affecting decision-making for businesses, investors and markets.
To explore this relationship, the researchers combined large-scale crowdsourced earnings forecasts from Estimize—a public forecasting platform where users, from students to professionals, submit earnings predictions for publicly traded companies—with nationally representative mental health data from Gallup.
Jannati said it offers a rich dataset because it includes a diverse mix of forecasters, assigns a timestamp to each earnings estimate made on the Estimize platform and allows direct comparison with actual earnings results.
The team matched each earnings forecast with the national level of depression in adults in the U.S. at the time it was issued, then examined whether forecast accuracy changed as depression levels rose or fell. They also tested whether reduced optimism and slower, more deliberate thinking helped explain the results.
The researchers ultimately found that higher levels of non-severe depression are associated with improved forecast accuracy, especially when forecasts are overly optimistic or when analysts take longer to issue their estimates.
Jannati said she was most surprised by how consistent the accuracy improvement was across many different tests, including alternative measures of depression and variations across states.
“We expected some relationship, but not one that remained robust across so many tests including instrumental-variable analysis, alternative depression measures and state-level variation,” she said.
For business leaders and investors, the research reinforces that emotional states can meaningfully influence financial judgment. Forecasts are shaped not only by models and data, but also by the mindset and biases of the people creating them.
“Optimism, while beneficial in many contexts, can impair the objective assessment of information,” Jannati said. “Conditions that temper excessive optimism, whether structural or psychological, may lead to more realistic expectations and better forecasting performance.”
Jannati said the study opens new avenues for research, including how other long-term psychological states influence market behavior, whether similar patterns appear in high- pressure professional environments, and how organizations can reduce optimism bias through system design rather than mood.
Exploring these questions, she said, may reveal even more about the human side of financial decision-making.
— Chloe Moore, College of Business
About The University of Texas at Arlington (UTA)
The University of Texas at Arlington is a growing public research university in the heart of Dallas-Fort Worth. With a student body of over 42,700, UTA is the second-largest institution in the University of Texas System, offering more than 180 undergraduate and graduate degree programs. Recognized as a Carnegie R-1 university, UTA stands among the nation’s top 5% of institutions for research activity. UTA and its 280,000 alumni generate an annual economic impact of $28.8 billion for the state. The University has received the Innovation and Economic Prosperity designation from the Association of Public and Land Grant Universities and has earned recognition for its focus on student access and success, considered key drivers to economic growth and social progress for North Texas and beyond.