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Herding Behavior and Analysts
The investment literature demonstrates quite clearly that analysts tend to converge toward the "prevailing consensus forecast." In plain English, they are inclined to avoid sticking their necks out too far, and more or less recommending the same investments as their colleagues. They probably don't get carried away with greed and panic the way some private investors do, but all the same, going with the flow is not what analysts are there for. At worst, one could argue that one simply does not need analysts unless they do their own homework and form their own opinions. Forecasts that diverge from those of colleagues are generally referred to as "bold," whereas those that go with the flow are indeed termed "herding forecasts." While excessive boldness can obviously be dangerous for investors and the analysts themselves, excessive herding tendencies surely make the analysis a bit pointless. After all, if analysts become part of a speculative bubble, they lose their objectivity and independence.
What Leads to Bold or Herding Forecasts?
Analysts who are more confident in their information sources, and presumably in their own abilities, tend to be bolder. Therefore, experience should raise the level of boldness and general, rather than firm-specific experience, seems to help as well. Working for larger brokerage houses evidently increases boldness and so does giving forecasts that are not extremely complex. Having an established reputation as an analyst also allays fears of going out on a limb and away from the crowd.
Conversely, herding is likelier with inexperienced analysts who lack confidence, work for smaller houses and do complex work. They will be wary of "deviating from the mean." Leader-follower effects may also prevail, such that one or more analysts become regarded as gurus and lesser "mortals" tend to follow them blindly and timidly. ... Continue to read.
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