“a mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members striving for unanimity override their motivation to realistically appraise alternative courses of action”
The quotes in the graphic above come from an MMA Australia equity placing last year. As a follow on to an earlier post I made regarding equity analysts at investment banks I read this article in the Financial Times Alphaville blog this week which makes essentially the same point:
The problem is that equity research has a famous bias towards positivity. Investment banks seek to do business with companies, which tend to dislike sell ratings. Stock markets spend most of their time rising. Fund managers don’t love to be told their decisions to invest in something is wrong…
So, it is very rare to see more than a quarter of analysts recommend their clients sell a stock
The distribution of ratings bears this out. Goldman Sachs aims to have 10 per cent to 15 per cents of stocks it covers rated as a sell. Morgan Stanley discloses 18 per cent of 3,200 stocks covered are rated underweight/sell. For UBS the global figure is 16 per cent. Investec has just 9 per cent of European and Hong Kong stocks on a sell rating.
How could the offshore analysts of some of the major maritime banks have been so positive when managers in the industry are saying things are very different? And in fact MMA’s latest financial results offer no hope of a market recovery?
Part of the answer I think lies in the psychology of groupthink (a classic article on it is here which applies this logic to the Challenger disaster). Another part of the answer lies in behavioural economics where analysts exhibit a positive confirmation bias, in which they look, and notice, information that accords with their preconceived ideas. This bias comes about understandably because analysts are employed by firms seeking to do business with companies they write reports about (and to be clear analysts who a nicer to managers get preferential treatment). People who want unbiased advice should probably pay for it from someone who owes them a duty of care is my takeaway… but hey I’m biased…