Monday, June 15, 2020

First Impressions Matter - A New Important Bias

Of course everyone involved with investments does deep research. No one would make important decisions on first impressions. Wrong. We now have proof of what you may have been told by your parents when walking out of the house on a first date or a job interview, first impressions matter. 

A thought-provoking piece of research shows that analysts are biased by their first impressions. Looking at over 1.5 million firm-analyst observations spanning over 30 years, the researchers of “First Impression Bias: Evidence form Analyst Forecasts” found that the first impressions of equity analysts have a lasting association with their future forecast behavior of a firm.

Analysts who have a positive (negative) first impression will have optimistic (pessimistic) future forecasts. Firms that have higher positive first impressions will have higher target prices and more likely "buy" recommendations. This impressions will fall over time, but negative impressions last longer than positive impressions. While other researchers have shown that there is a greater emphasis on recent information, this research suggests that there is a U-shaped relationship with events. There is emphasis on first impressions and then an emphasis on more recent events.

While this research is interesting for trying to discount the value of analysts, the impact of an impression bias effect can be much broader. The choices made by investors with respect to hedge managers selection may also be biased by first impressions. If this research on first impressions is true, a good or bad impression when meeting a manager will have a long-lasting effect. If you think the manager is smart, you will give them the benefit of the doubt. If you are not impressed by what you see, their presentation is likely to be tossed into the discard pile. 

Given all of the information that investors see on any given day, judgments often have to made quickly, yet those quick first judgments may bias any future view. Guard against first impression bias. 

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