Home > CFA L2 > Just don’t check their pockets, then

Just don’t check their pockets, then

Any budding CFA candidate has got to read this…

Herding – the behavioural trait that causes investors to move in a given direction at the same time – is triggered by career related incentives. This, of course, is not generally a factor for private investors and therefore is often neglected in considerations about why professionals make their recommendations.

What they find is that younger analysts tend to herd more than their more experienced colleagues: less experienced analysts tend to be punished more heavily for getting their forecasts wrong so they have every incentive to stick with the crowd. In contrast older analysts, who have presumably built up their reputations, face less risk of termination. Basically if a younger analyst makes a bold forecast and gets it wrong they’re likely to lose their job, while doing so and getting it right seems to make little difference to their immediate career prospects.

One possibility, then, is that the optimism bias perpetuates itself among the analyst community by steadily increasing the punishment for any single analyst to deviate from it (and be wrong).

I guess the CFA standard of professional conduct on “Independence & Objectivity”

Exercise diligence, independence, and thoroughness in analyzing investments, and making investment recommendations, and taking investment actions  [emphasis mine]

goes out the window because of fear of losing your job…

no wonder CFA Institute is reluctant to add more behavioural finance material to the curriculum…

via FT Alphaville » Just don’t check their pockets, then

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