«Analysts at Goldman Sachs JB Were have written a remarkably honest confession to their clients about why analysts keep getting profit forecasts wrong in a downturn like this. (...)
Here is a summary of the four reasons they cite:
– They haven’t seen anything like this before – that is, “the paucity of financial crises … in recent history” means they tend to “underestimate the effects of systematic or top-down developments”.
– The companies haven’t seen anything like this before. A survey of analysts reveals that 25 per cent of companies that used to provide profit guidance no longer do (and guidance is all-important – see the next point, below). CEOs, they say, are chosen for their “left brain skills: optimism, ambition, hard work, focus and decisiveness. Patience and an appreciation of history are not considered virtues for these individuals".
– Analysts “seek to curry favour with management in order to preserve their information networks". Everyone knew this already, but it’s the first time I’ve seen it admitted.
– Analysts need to manage their “reputational risks”, so they “engage in herding behaviour”. That is, the costs of getting a big call wrong far outweigh the benefits of getting a big one right.»
Business Spectator
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