The 2018 Olin Business magazine shared a series of vignettes featuring alumni faced with a business decision requiring them to weigh data with their values. We featured these stories to support Olin’s strategic pillar focused on equipping leaders to confront challenge and create change, for good. This is one of those vignettes.
Data and values are important in making big decisions, but as Cash Nickerson, JD ’85, MBA ’93, points out, “there are really very few momentous decisions.
“We make hundreds of decisions in a day,” said Nickerson, an author and president/principal at PDS Tech Inc., one of the largest engineering and IT staffing firms in the United States. “Many are trivial. But many of the trivial decisions come back to you in one form or another.”
Nickerson thinks in terms of a “structure of thought,” a muscle he’s developed so those everyday decisions are still based on data and values. “What fascinates me more than how someone makes the big decisions is the algorithm an executive uses for making the everyday decisions,” he said.
For him, that algorithm focuses on people.
“I like to think of myself as very numbers driven as well as values driven,” Nickerson said.
“My philosophy is that I wake up every morning and remind myself of the uniqueness of humans. To me, it’s a value to treat each person as an individual.”
This story includes material contained in a news release issued by the American Accounting Association. Researcher Philip Berger received financial support for this research from Chicago’s Booth School of Business.
A common assumption is that stock analysts gather earnings and other pertinent information to communicate to current and potential stockholders, and then incorporate that information by revising their current-quarter earnings forecasts.
So much for that perception. A new study involving two WashU Olin faculty members finds that analysts disseminate earnings news by revising share-price targets or stating they expect firms to beat earnings estimates, often tempering such information—even suppressing positive news—to facilitate beatable projections.
The study discovered that, when it comes to the current-quarter earnings reports that are analysts’ most closely followed work product, analysts become selective about which forecasts they update and what information they convey. The researchers found that later forecasts issued by the same analyst—such as share-price target revisions, forecast revisions to the other quarters’ forecasts or textual statements about earnings after the last quarterly forecast—surprisingly predict errors in the analyst’s own current-quarter forecast. These associations are much stronger for good news, consistent with analysts catering to managers’ desires to meet or beat earnings forecasts.
Using data from 8,860 analysts covering 7,933 unique companies over 71 quarters, the researchers reported the likelihood of a downward revision of current earnings estimates came at a 50-percent greater possibility than an upward revision: 19.5 percent downward vs.13 percent upward. When it came to revising stock-price targets and future-earnings estimates, however, the reverse was true to a 20-percent greater possibility: 11.2 percent upward vs. 9.3 percent downward. The firms most likely to meet or beat earnings were those with positive price-target revisions, suggesting those revisions were at least partially motivated by prior omitted earnings information.
There are two important takeaways from these findings, Kaplan and Ham said.
First, one of the reasons managers are so successful in meeting or beating earnings forecasts is that they persuade analysts to omit positive news from forecasts.
“Managers care a lot about beating earnings forecasts, and analysts rely a lot on managers, so upsetting them is not really an option,” Kaplan said. “Additionally, analysts care deeply about conveying information to their clients, so they cannot merely issue beatable forecasts. The way we find analysts deal with this dilemma is by conveying positive news through the text of their reports and share-price target revisions—this allows managers to meet or beat estimates while also allowing the analyst to update clients about positive news.
“Non-clients, who rely on earnings forecasts because they do not have access to the whole of an analysts’ work product, end up with skewed information, but this is not an issue for the analysts’ business,” Kaplan said.
The researchers said that analysts purposefully lower, or “walk down,” projections. By keeping earnings forecasts low and neglecting some positive developments, the researchers wrote, analysts “cater to managers’ preferences for a walked-down (earnings) forecast pattern. The pattern we document, however, includes avoidance of walking up rather than only a walk-down. … Non-earnings forecast signals are more prevalent for positive news than negative news, consistent with analysts responding to incentives to issue [earnings] forecasts managers will meet or beat.”
Second, by not disseminating all information through current quarter’s earnings forecasts, which are widely available through commercial databases, analysts provide an advantage to clients who have paid for access to the full breadth of their research product.
“Analysts convey information in ways that enable them to be of service to clients, who they care about, and, at the same time, to avoid displeasing corporate managers, who they also care about,” Ham said.
The study may offer a lesson to the broader public: Perhaps widely circulated earnings forecasts aren’t as informative as people think. If you want the best information an analyst has to offer, you have to pay for it.
In a separate survey of brokerages’ reports to clients, the researchers learned that — without changing forecasts — analysts didn’t refrain from explicitly predicting firms would beat or miss their targets … and the “beat” or positive predictions outnumbered the “miss” or negative predictions by roughly 30 percent.
A standing room-only crowd of enthusiastic visitors—along with another 140 by live stream—attended WashU Olin’s second annual “She Suite” event commemorating International Women’s Day. The wide-ranging panel discussion featuring five Olin alumnae (and one professor) touched on issues including confidence in the workplace, pay equity, the worst workplace advice, work-life balance and “something you believed early in your career that you now think is wrong.”
“A common notion when I started in the ’80s was in order to advance you had to leave others behind. The second was you had to wait your turn,” said Leann Chilton, EMBA ’99, vice president for government relations at BJC HealthCare. “Both of those notions were completely ridiculous. Being the youngest of five, I was not going to wait my turn.”
The panel, moderated by Linda Haberstroh, EMBA ’10, president of Phoenix Textile Corporation, also included:
Ratna Craig, EMBA ’11, account executive at Slalom Consulting.
Hillary Anger Elfenbein, WashU Olin’s John K. Wallace, Jr. and Ellen A. Wallace Distinguished Professor and professor of organizational behavior.
Vicki Felker, EMBA ’12, vice president and general manager, Golden Products Division, Nestlé Purina.
Valerie Toothman, BSBME/BSAS ’01, MBA ’08, executive vice president for brand and beverage marketing at Drinkworks.
“Especially before coming to WashU, I believed if you did an excellent job you’d get promoted,” Toothman said. “But you have to do a lot more than that. That’s table stakes. It’s about understanding the politics—not necessarily participating, but understanding it—and understanding the gaps between where you are and where you want to go. You have to be thinking one step, two steps, three steps ahead.”
In her response to the same question, Craig noted that her expectation for her career included “a recipe for work-life balance, which is complete BS. It’s about work-life integration.”
Later, members of the panel further explored the question of balance—the theme for this year’s International Women’s Day.
“The research is very clear that we have spillover from one domain to another, from work to your home life and from your home life to work,” Elfenbein told the audience. “If you’re carrying stress from your home-life you’re going to be a lesser employee. The research is very firm about that.”
“The word balance means you’d better figure out what matters to you personally,” Felker said, “and then figure out how what matters to you affects the people who matter to you.”
five years ago, some of the most spectacular facilities of the Olin campus
opened for their first
day of classes: students, faculty, staff and WashU leaders gathered
in Frick Forum for free coffee and doughnuts and to celebrate the debut of
Bauer Hall and Knight Hall.
In fact, exactly
five years ago tomorrow, my predecessor, Dean Mahendra Gupta, drafted a
blog post announcing the opening ceremony—noting that the new
buildings would double WashU Olin’s footprint on the Danforth campus—and
heralding a dramatic renovation to Simon Hall, which had opened as Olin’s
headquarters under Dean Bob Virgil’s leadership.
On that St.
Patrick’s Day in 2014, under a crisp blue sky that shone down through the
atrium, WashU officials made their remarks before a banner announcing “Four
Buildings, One Olin,” a sign of pride and, perhaps—in its explicit mention of
Olin’s split campus—an acknowledgement of the challenge ahead.
was this: maintaining a sense of unity and esprit
de corps among the faculty and staff of our extraordinary business school.
With Olin employees spread among Knight Center and Knight, Bauer and Simon
halls, a special commitment is required to foster collaboration among faculty,
teamwork among staff members and a sense of camaraderie among everyone who
passes through our hallways, our common spaces and our classrooms.
I wasn’t here
for the grand opening, but I’m delighted now by what I see among my colleagues
as they have taken on the challenge, with admirable results.
year, for example, Hillary
Anger Elfenbein has kicked off a series of “across the field”
luncheons for full-time faculty. The idea was to convene on either side of Mudd
Field one Friday a month. So far, the faculty has met for three such
“The idea is
for faculty to interact on an informal basis—particularly those who work in
separate buildings,” Hillary said. “Ever since we moved to separate buildings, it’s
been harder to have informal interchange. This initiative is meant to address
that. The faculty appreciate it greatly.”
arrival at Olin, I’ve also had the pleasure to meet and engage with many of the
faculty and staff at a series of events the Olin Staff and Faculty Advisory
Committee has arranged. Though I could only participate in the recent doughnut
Twitter, I have enjoyed mixers in the courtyard, an ice cream social
and our holiday ornament exchange in December—an extremely exuberant (and
surprisingly competitive!) event indeed.
I am equally gratified by the work Sandy Vaughn has put forth in organizing a series of lunch-and-learn events that have bounced back and forth between Simon and Bauer halls.
So far, staff and faculty have had the chance to attend four such events, two of which relied on the expertise of our faculty: most recently, Hillary Elfenbein focused on negotiating and, before that, Sergio Chayet hosted a lunch-and-learn on project management.
Earlier sessions drew on WashU HR experts sharing resources for career development and wellness initiatives on campus.
Of course, none of this replaces the one-on-one interactions that happen every day, or the team-oriented projects that advance our school’s work for students, alumni, and the community at large, or the work of our faculty that advances our international reputation for path-breaking research and educational excellence. In fact, our “across-the-field” initiatives are a reflection of the fact that we indeed think and act as “one Olin.”
Pictured above: Olin Professor Sergio Chayet, director of the master of science in supply chain management program, hosts a lunch-and-learn for Olin staff and faculty on project management on January 25, 2019.
With a web browser or a cellphone, consumers today are making decisions about causes to fund, stocks to pick, movies to watch, restaurants to visit, products to buy, and music to hear partly based on the answer to a single question:
What does everyone else think?
Sites such as Yelp, Amazon, Rotten Tomatoes, and Kickstarter harness the collective wisdom of past consumers to guide future customers. But before those customers jump on the bandwagon and buy a dinner, a book, or a movie ticket, suppose there were a way to make the bandwagon better?
That’s the central question behind “Harnessing the Wisdom of Crowds,” a research paper by Olin’s Xing Huang published in the journalManagement Science. Huang and Zhi Da of the University of Notre Dame used data from financial platform Estimize.com, where professional analysts, amateurs, and students provide quarterly earnings-per-share estimates for publicly traded companies.
The researchers found that the less each Estimize user knew about other users’ estimates, the more accurate the crowd’s average estimate became. In fact, the difference was profound: When Estimize users could see other users’ estimates, the consensus estimate beat the Wall Street consensus nearly 57 percent of the time. When they couldn’t, however, the consensus was more accurate 64 percent of the time.
“The problem with seeing others’ information is that people tend to herd with others,” Huang said. “That makes individual forecasts more accurate, but … reduces the consensus accuracy.”
The observed herding behavior was among the paper’s key takeaways. When individual users have access to forecasts from the community at large, they tend to “herd” along with other forecasts. But even further, herding behavior makes users “individually smarter, but collectively dumber.” The paper also noted that herding matters most when “influential users” make their forecasts early.
Results covering data from March 2012 to June 2015 were so stark, Estimize changed its platform by October 2015 to prevent users from seeing other users’ estimates before posting their own. “We were floored by the results,” the Estimize blog reported. “The ‘blind’ data set was unequivocally better.”
“We were also quite lucky to collaborate with Estimize to run experiments where we can randomize the information sets of users,” Huang said.
The researchers used data from 2,516 Estimize users who made estimates ahead of 2,147 earnings releases from 730 firms. But Huang said the results could be instructive for any site that aggregates crowd wisdom—including voting platforms, crowd-funding sites, or product review pages—if they can segregate individual views from those of the community at large.