The CFA level 3 program has a section on behavioral finance which is my favorite one. One of the concepts they discuss is "anchoring and adjusting" which is described as when a person is so entrenched in their forecast/point of view that he does not fully incorporate new information to his existing stance. Instead, he just marginally adusts it. As a result the person's forecast/point of view tends to continuously over or under estimate the actual results.
Analysts tend to do this with earnings forecasts. I just read the following on Bloomberg:
Analysts overestimated earnings by an average 13 percentage points in each period between the third quarter of 2007 and the end of 2008. Better-than-expected first-quarter results haven’t prompted them to boost forecasts for the rest of 2009. Instead, they’ve ratcheted down predictions as the first global recession since World War II weakened demand.
So, despite the fact that earnings were much better than expected analysts are LOWERING their forecasts. Is this yet again anchoring I see? And the strange thing is that the "adjusting" is going in the opposite direction! Thus, it looks like analysts are doing what I now call "anchoring and negative adjusting" or I suppose you can also call it "anchoring squared"
These lowered expectations in the face of better than expected data is actually a positive thing for the markets because now it will create a wall of worry and puts the market in a better position to get positive surprises going forward. Perhaps the analysts will be right...in that case then it's not a good thing for the market but given how analysts have a less than stellar track record in getting things right (especially at turning points) I wouldn't hold my breath.
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