The analysts at Goldman Sachs recently published a report on how behavioural biases basically screw up every aspect of the investment process.
For example, take Wall Street’s forecasts for revenue growth.
“[T]op-line variability is consistently underestimated,” they write. “Consensus revenue growth forecasts will typically start in the 5%-6% range for the market at large, but the true outcome almost always turns out to be a significantly higher or lower level. While nine of the last 10 years’ consensus revenue growth forecasts have been initially in the 5%-6% range, no year saw actual growth within that range.”
“Clustering at mediocrity,” they write. “Analysts are reluctant to take a significant view on growth ahead of the date (conservatism, risk aversion), and/or are anchoring to economists who themselves are making the same mistake.”
Here’s the chart they include that shows how top-line growth rates almost always start at the same place, but very greatly throughout the year.
Photo: Goldman Sachs