identifying bias

Picked up the books today and started reading behavioral. So the author identifies a bunch of biases to watch out for, but it seems they are only identifiable ex-post. For example, if you’re reading an analysts earnings forecast, how can you possibly know if he/she is anchoring until you know what the outcome is? If you can’t, then I don’t see how this subject is useful. The only use I can see is maybe when looking at market level earnings estimates using bottom up company estimates. Then maybe you can say on average there’s likely to be such and such bias so the market estimate is likely too high/low. Or, maybe I just haven’t read far enough to understand how this is useful…

You’re not going to look at an earnings forecast and immediately draw the conclusion that the analyst is absolutely anchoring, etc. The idea is that by understanding investor (or in this case analyst) psychology, you can incorporate the possibility that the analyst MIGHT be anchoring when interpreting their results. For example: if the analyst initially had a low earnings forecast and has underestimated earnings for the 3 consecutive quarters, you might suspect that anchoring is a factor and adjust their forecast accordingly.

The problem with operationalizing the whole behavioral finance approach is that they’re based on cognitive processes, and those are inherently fuzzy (particularly mine before my morning coffee). But as McLoed said, they provide indicators that could be useful to take into account.