The economy may be cyclical, but most of us hope our careers won’t be. However, for top executives, past economic downturns can leave a lasting mark. New research from George Mason University finds that memories of previous recessions—brought back by more recent ones—can influence CEOs’ decision-making for years.
The study focused on how the 2008 financial crisis triggered veteran CEOs’ memories of earlier downturns. Researchers examined 3,678 annual earnings forecasts made by 466 CEOs at U.S. public companies between 2002 and 2018. The analysis revealed a clear pattern: CEOs with prior experience leading companies through recessions issued noticeably more pessimistic forecasts after the 2008 crisis.
This effect wasn’t seen in CEOs who had no recession experience before 2008. The more recessions a CEO had experienced, the stronger their post-crisis pessimism. The researchers quantified this pessimistic bias, finding it could reduce share prices by 0.23%–0.29%, on average.
Unjust caution
Interestingly, the cautious forecasts weren’t more accurate—they reflected excessive conservatism rather than justified caution. Researchers ruled out aging as the cause, confirming that the effect was tied to specific memories of past recessions.
“Two CEOs of the same age—one with recession experience and one without—will show different levels of pessimism after a crisis. The experienced CEO will tend to be more pessimistic,” the authors explain.
Highly skilled CEOs, measured by a managerial ability scale, were less prone to this bias, while those leading more complex organizations showed greater susceptibility. On average, it took three years for seasoned CEOs to shake off the pessimism triggered by the 2008 crisis.
While past experiences often help leaders navigate challenges, in this case, they appeared to slow post-crisis recovery by fostering overly negative expectations. “Executives are human,” the researchers note. “Their experiences may scar them, leading to excessive caution during future crises.”
Importantly, the study didn’t measure how these pessimistic forecasts affected companies’ actual recovery timelines. However, for investors and market observers, the findings suggest a valuable lesson: After a major economic downturn, take CEOs’ gloomy predictions with a grain of salt.
