Very interesting blog post:
One of my former students, … is abolishing the use of target prices … for two reasons.
- First, he wants all of the analysts to express their opinions in expected value terms, an exercise that compels discussion about payoffs and probabilities. Entertaining various outcomes also mitigates the risk of excessive focus on a particular scenario — a behavioral pitfall called ‘anchoring.’
- “Second, expected-value thinking provides the analyst with psychological cover when they are wrong. Say you’re an analyst who recommends purchase of a stock with a target price above today’s price. You’re likely to succumb to the confirmation trap, where you will seek confirming evidence and dismiss or discount disconfirming evidence.
