Not all financial analysts impeded by sleep disruptions, study finds

LAWRENCE — Get a good night’s sleep.

That recommendation has been around for generations, whether advising students prepping for school tests or athletes competing in sporting events. So it stands to reason it should equally apply to those making critical decisions in financial markets. But new research suggests the adage is not always so applicable.

“Prior research on the role of sleep in a financial setting is inconclusive — some studies show that market outcomes, such as stock prices, are impacted by disruptions to participants’ sleep, while other studies find no significant effects,” said William Bazley, assistant professor of finance at the University of Kansas.

“This mixed evidence is puzzling because financial decision making relies on higher-order cognitive processes, and insufficient sleep impairs cognitive processing.”

His new paper titled “Sleep Disruptions and Information Processing in Financial Markets” attempts to solve this puzzle. It finds that sleep disruptions following spring daylight saving time clock shifts do not negatively affect the forecast quality of the average professional analyst but significantly reduce the accuracy of novice forecasters. The paper appears in Management Science.

Co-written by Kevin Pisciotta, a fellow KU assistant professor of finance, and Carina Cuculiza of Oklahoma State University, the research reveals that — while individuals’ cognitive performance and information processing abilities in a financial decision-making context are affected by sleep disruptions — the evidence underscores the importance of experience and expertise. These traits can provide people with tools and techniques that help them counteract the negative effects of such disruptions. Consequently, this knowledge can help inform practices within institutions.

Why do professional forecasters and novice forecasters react so differently to sleep?

Bazley cites prior studies that find more experienced flight crews are less affected by sleep disruptions than younger flight crews. Existing literature also highlights how learning from prior experience can reduce the cognitive demands of a particular task and support performance.

“As a result, ‘expert’ forecasters or those with more experience are likely to drain fewer critical thinking resources when processing financial information compared to more novice forecasters,” he said.

To arrive at these conclusions, Bazley analyzed earnings-per-share (EPS) forecasts submitted to data provider Estimize by both buy-side/sell-side professional forecasters and nonprofessional forecasters. Estimize has grown to incorporate forecasts that span more than 3,000 stocks from more than 100,000 forecasters. 

In order to test this hypothesis, Bazley required a systematic shock to individuals’ sleep and an objective measure of the quality of their financial information processing. So he used the clock change associated with daylight saving time, as some people are likely to lose an hour of sleep. He then compared individuals’ forecasts of firms’ EPS around this clock change, as information processing is fundamental to a person’s ability to produce accurate forecasts of future earnings. 

While the research did not specifically examine other decision contexts, it is reasonable to infer such disruptions could affect decision-making and performance in settings beyond the financial sector. 

“Broadly speaking, factors that disrupt individuals’ sleep could potentially lead to increased errors in roles requiring information processing, particularly among less experienced professionals,” he said.

Bazley came to KU in 2019 after earning his doctorate from the University of Miami. The St. Louis native’s research primarily focuses on household finance. However, he incorporates aspects of behavioral/social influences and fintech to this field.

“We hope our paper contributes to furthering the knowledge base related to how individuals process, interpret and apply financial information,” said Bazley, whose latest research won the Spears School of Business Best Paper Award at Oklahoma State University in 2024.

“Ultimately, clarity about these processes can support thoughtful initiatives that could improve welfare outcomes.”