Saturday, May 22, 2010

Explanations for the generation-long over-optimism on the part of equity analysts :

According to Harvard Business Review's "The Daily Stat", reporting research by McKinsey, equity analysts have been over-optimistic for a generation:

"For the past quarter century, equity analysts' earnings-growth estimates have been almost 100% too high. Their overoptimistic projections have generally ranged from 10% to 12% annually, compared with actual growth of 6% (excluding the spike in growth from 1998–2001).... Only in strong-growth years such as 2003 to 2006 did forecasts hit the mark".

Neither McKinsey nor HBR explore why this may be so.

I suggest three possibilities:

1. That there is something personally wrong with most equity analysts (only over-optimistic people are attracted to the profession)

2. That there is something the matter with the way they are educated (their education programmes them to be over-optimistic)

3. That there is something awry with the way they are compensated (they are paid for being optimistic, and penalised for being pessimistic or even realistic).

Any other explanations, anyone? Sphere: Related Content

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