Career risk causes biased recommendations

Analysts are biased. Most investors would agree. The bias is associated with fear and greed. The fear of being fired and of getting kudos from clients. Of course, this is all about money. It is a story we have heard before, but it can be explained through a simple two-by-two graph. Barry Ritholtz presented this funny graph on twitter that has a significant amount of truth on how the bias works. 

Any broad market prediction by an analyst is usually going to be a bullish or bearish bet. The result of the forecast is simply either being right or wrong. If you are bullish and you are right, you will be the darling of most investors. You did your job. If you are bearish and right, most investors will respect you, but it is unlikely that they will feel good about it. Most likely they did not fully invest with your recommendation, so they are still going to see loses. If you are bullish and follow most other analysts and prove to be wrong, it is unlikely that any investor will fire you for your poor insights. There is likely to be a multitude of answers for why you did not see the downturn coming. Everyone can feel bad together. Many will just say, "We didn't see that coming." In the last case, if you are bearish and wrong, investors may be out of the market and miss what is perceived as the big opportunity. This is a reason to be fired. The answer is clear. Don't make bearish calls.

Given this bias, what can investors do about it? You cannot change analyst behavior, but you can change where you are getting your recommendations. Simply use models. Models don't have this bias against being fired. Models don't want to be heroes. Model just do what they were built to do and provide unbiased advice.  Follow that data.