Jonah Lehrer: Optimism Bias- Equity analysts: Still too bullish

Original source: SimoleonSense.com .

A H/T Jonah Lehrer he consistently finds good reading material and links to them via the Frontal Cortex blog.

I’m especially happy this time, as Lehrer ventures into finance and equity analysis–spotting an interesting piece via the McKinsey Quarterly.

Excerpt (via McKinsey)

No executive would dispute that analysts’ forecasts serve as an important benchmark of the current and future health of companies. To better understand their accuracy, we undertook research nearly a decade ago that produced sobering results. Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.¹

Alas, a recently completed update of our work only reinforces this view—despite a series of rules and regulations, dating to the last decade, that were intended to improve the quality of the analysts’ long-term earnings forecasts, restore investor confidence in them, and prevent conflicts of interest.² For executives, many of whom go to great lengths to satisfy Wall Street’s expectations in their financial reporting and long-term strategic moves, this is a cautionary tale worth remembering.

Image (accessed via Jonah Lehrer)