Diagnostic Expectations and Stock Returns. Andrei Shleifer, July 2017, Paper, “We revisit La Porta’s (1996) finding that returns on portfolios of stocks with the most optimistic analyst long term earnings growth forecasts are substantially lower than those for stocks with the most pessimistic forecasts. We document that this finding still holds, and present several further facts about the joint dynamics of fundamentals, expectations, and returns for these portfolios. We then propose a new approach to modeling belief formation and over-reaction to news that explains these facts, based on a portable psychological model of judgment by representativeness.Link