Biased toward believing
It seems counterintuitive: Why would professional givers of financial advice consistently fall for lying executives? And why would the most reputable advisers seem to have the worst results?
These findings reflect the natural human tendency to assume that others are being honest – what’s known as the “truth bias.” Thanks to this habit of mind, analysts are just as susceptible to lies as anyone else.
This seems weird to me.
If there’s a bias towards believing, then why did financial analysts discount the more honest CEOs? I don’t really think a natural tendency to believe people are telling the truth explains this difference.
Think about it this way, you’re an analyst and two CEOs come to you. One of them says his company is doing alright, it has a few issues, but profits are stable and they’ve got a plan for dealing with their problems that should see profits start to rise in the next couple quarters. The other CEO tells you his company is doing amazing, profits are way up, and they’re getting ready to launch a product that’s going to be flying off the shelves so much so they’re not even sure they’ll be able to keep up with demand.
Now, assuming you believe both CEOs are telling the truth you’ll obviously choose to invest in the second guy rather than the first. The problem of course is the first guy was being completely honest and giving a reasonable measured assessment of where his company is at, while the second guy is completely full of shit and is planning on running away with your money the moment your back is turned because his company is teetering on the edge of imploding.
That’s a good explanation and I see the argument, now. Thanks!
im a bit out of my element here but also, when you file a 10-K, you get a lot of free text, right, more than a 10-Q? Who wouldn’t use that as an opportunity to sell yourself, especially if people are jumping on them the moment they’re released.