representativeness vs anchoring stock, happening, positive, surprise, opposite

Viceroy

feel like i'm kind of getting conflicting messages out of the materials.

SO if representativeness holds, a stock that has a positive earnings surprise will result in investors buying the stock, which can push the stock price past its justified value (with the opposite happening for negative surprises). So essentially, overpriced "winners" will underperform and underpriced "losers" will outperform.

Meanwhile, according to anchoring, a positive (negative) earnings surprise may be followed by future positive (negative) surprises because analysts don't fully incorporate the new information into their forecasts. This would indicate that investors should buy after an earnings surprise and sell after a negative surprise.

Aren't these 2 strategies in direct conflict? which one is "right"?

nannan66

with regards to anchoring - not sure that someone should buy after a positive earnings surprise. given that there was a positive earnings surprise - something was missing in the analysis. not all known factors were incorporated. That was the reason for the positive earnings surprise. if an analyst incorporates all known information, there would be no more any reason for the earnings surprises. based on all known information - if someone now bought that stock - based on supply and demand - it's price would further go up. and then the returns on that stock based on the price you now bought it at, is not going to be as high.

representativeness - is like Stock A succeeded, so let me invest more in it. again just based on history, without doing any analysis. if all known information is not incorporated, you would end up with the same results as in the anchoring case.

so I think the main takeaway is - do not be biased by past history, but incorporate all known information before a buy/sell decision is made.

CP

Colum

CP, not sure if I agree with you fully there. Anchoring is more you are set on your original forecast. So even if new info comes to light, like a positive earnings surprise, you don't take that info in fully and sort of lock into your original forecast. for positive earnings surprises, this would tend to lead to still an upward movement then on the name as you are more or less sandbagging your forecast and being overly conservative b/c that was your original anchor. You would tend to see positive earnings surprises then followed by positive stock movement as that information slowly gets incorporated in. With representativeness, it's more like what you said above. People use their past experiences to make a biased opinion, can buy up a stock, and perhaps take it further than where it should logically be. So the 2 are different in driving a price up. Anchoring is more the slow play of the stock up as you slowly start to notch your forecast up as the good info comes out, where as representativeness is more you think the stock is a winner because it has been or you think it will be going forward, so you keep pushing it up.

neither strategy is "right", just psychological reasons perhaps that a positive earnings surprise could lead to further upward movement and/or why some stocks that have been winners are also pushed up, perhaps past a logical valuation point... making these overpriced winners eventually proned towards underperformance as valuations come back in line.

bkballa

ok, i gotcha - so its not a "one size fits all". in some circumstances, representativeness can explain a mispricing, while in others anchoring issues can result in a mispricing...

former

Either theory could be right, or different people can be susceptible to different biases. The curriculum only explains what the potential biases are, not which ones are more/less common.

PalacioHill

haha you'll be begging for this stuff when you hit 2 bond hedges, homeboy.

Analyze_This

bannisja Wrote:
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> haha you'll be begging for this stuff when you hit
> 2 bond hedges, homeboy.


Actually I prefer the 2bond hedges to all these representativeness and anchoring that all look the same...