Representativeness and Conservatism

LOS 9 Schweser states for Representativeness (stereotype): Assuming a good announcement implied good future performance (a winner) investors buy the stock and push its price up. Likewise, a bad earnings announcment (a loser) may be met with selling pressure, which drives the price of the stock down. The result is that overpriced “winners” will tend to underperform and underpriced “losers” will tend to outperform, as their prices return to the intrinsic values. Conservatism (anchoring and adjustment): Refers to the inability of analyts to fully incorporate the impact of new info (earnings surprises) on their projections. The inplication is that neagtive adjustments in price forecasts tend to be follwed by negative surprises. Positive adjustments tend to be followed by positive surprises. The “patterns” in price performance imply market inefficiency. ***************************************** As I see it, Representativeness is leading to an over-reaction bias and conservatism is leading to an under-reaction bias, correct? Having it both ways here aren’t we? Are there different forms of anchoring and adjustment other than conservatism? Am I wacked out and totally missing the point? Thanks.

They are 2 different phenomenon. They wont happen to one stock at the same time. They are 2 forms of bias we can see in the market at various times on various stocks.

What? How do you know that GSG? Say you have a positive earnings surprise, why couldn’t they both apply?

Yes they both can apply, you are right. Representativeness to the investors behavior and may be analysts trend following group behavior. Also anchoring as to not adjusting enough. I agree with what you are saying.

Cool. Anybody else have thoughts on this? Prove me and GSG wrong.

i can’t prove it wrong…