Stocktake: Depressed analysts make better earnings forecasts

A little depressive realism might do optimistic analysts no harm at all

As a general rule, analysts tend to be an optimistic bunch. Photograph: EPA

As a general rule, analysts tend to be an optimistic bunch. Photograph: EPA

 

Some psychological research suggests depressed people see the world more realistically – depressive realism, as it’s known. Might that also be true of market analysts?

Apparently so. A new study, Depressive Realism and Analyst Forecast Accuracy, examined data from polling group Gallup and Estimize, a website that allows users to submit company earnings forecasts.

“Pessimistic analysts during higher levels of depression have more accurate forecasts relative to those with optimistic forecasts,” the study found, indicating a “bad mood or emotional state” may drive better financial decision-making by “tempering overly optimistic expectations”.

Bad or sad moods, it suggests, may “promote a reasoning style that pays greater attention to detail and leads to processing information in smaller increments and at a slower pace”.

As a general rule, analysts tend to be an optimistic bunch. A 2010 McKinsey study found that, over the previous 25 years, analysts projected earnings growth of 10 to 12 per cent a year – almost double actual growth rates of 6 per cent. A little depressive realism might do them no harm at all. 

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