Behavioural Finance of Intel Company - Assignment Example

BEHAVIOURAL FINANCE JANUARY 10, BEHAVIOURAL FINANCE :CASE ANALYSIS Discuss whether the analysts (at large) following Intel appear to have been influenced by any biases, both generally and in their reaction to Intel’s announcement in September 2000. From the investor’s perspective, what biases could be present? Explain what biases are at play, how they affect the person or the situation and why you believe this. (4 marks) From the case study, there is influence by various types of biases with Hindsight bias being one of them. This is the inclination to see events past events as likely to recur more than they before the first occurrence. In hindsight, bias people tend to adjust their answers to match the correct one when they get information about the outcome of an event (Fischhoff & Beyth 13:1-16). In the case of Intel, the negative trend for the period of September 2000 through September 2002 is seen as a repeat of history. In September 2000, Intel issued a press statement indicating that its revenue in the 3rd quarter would grow between three per cent and five per cent contrary to the analysts forecast of between eight to twelve per cent. This can be seen as an adjustment to match the correct outcome. Overreaction bias is also at play in the Intel’s case. As the word overreact suggests, this bias is based on the tendency of investors to overreact to bad news in the market (Eli & Yoav 37:333-347). The Intel’s drop of stock by thirty per cent over the following thirty days comes after the announcement that growth would be between three and five per cent, instead of the expected eight to twelve per cent. While uncertainties increase over long horizons, increase in overreaction is directly proportional to that of uncertainties (Eli & Yoav 37:333-347). This explains why overreaction in analyst earning estimate depends on the duration of the estimate horizon. (Eli and Yoav 37:333-347). In the case of Intel, an academic research was carried out showing that analysts failed to use discounted cash flow analysis to estimate the fundamental value of Intel’s stock. Instead, the study pointed out that analysts react to bad news in the same way that a bond rating agency reacts to bad news. According to the study in Intel’s case analysts downgraded their stock recommendations just as a bond rating agency would downgrade the firm’s debt. To an extent, the status quo bias can be said to be at play. Some recommendation changes were extreme, what can be seen as a tendency by the analysts to have the firm return to its original status before it was rated the best. Status quo bias is cognitive whereby there is illogical partiality for the popular state of affairs (Kahneman, Knetsch and Thaler 98:1325-1348). 2. Discuss whether James Stewart’s assessment of eBay reflects any biases. You may choose to do some outside research on who Stewart is, his record, etc. Specifically address how this influential finance-personality contributed to any behavioural effects in play during the Intel-eBay stratospheric success of the late 1990’s (3 marks)  James Stewart is a journalist, a lawyer and an author from America. He has a column in the Wall Street Journal, United States’ largest newspaper by circulation, where he writes articles. He is a professor of economic journalism and a member of the bar of New York. Given the positions he holds, James Stewart is likely to be very influential especially through his articles in America’s largest newspaper. In the context of the study at hand, James Stewart assessment also reflects some biases. Among the biases is hindsight bias and January effect. January effect is characterised by buying stocks at a lower price towards the end of the year with a target of selling them at a relatively higher price in January the following year. James Stewart indicated that he would prefer to buy eBay stocks in the wake of their decline, which is a manifestation of him utilizing the January effect. James analysis also reflect having hindsight bias. In the case, eBay’s actual earnings for the 4th quarter of 2004 fell a penny below analysts’ consensus forecasts and subsequently eBay’s CEO stated that future earnings would be lower. As much as he mentioned that this would be as a result of high advertisement cost and reinvestment, hindsight bias cannot be overlooked in his analysis. Status quo bias is also evident in James’s assessment of the case of eBay. Status quo lead people to opt that thing remain the same and if they have to change, the change should be minimal (Samuelson and Richard1:7-59). James Stewart acknowledged that eBay would not grow at a stratospheric rate forever noting that eBay has a natural monopoly as much as it was in the process of transforming world commerce. Overreaction bias cannot also be overlooked in the case of James Stewart and eBay. Analysts downgraded eBay’s stock soon after the stock price fell from 103 dollars to 81 dollars per share and the firm’s market value fell to 56 billion dollars. This was in response to the announcement that future earnings would be lower. This also caused eBay’s CFO to issue a statement saying that his interest was managing eBay’s long run prospect, not its stock price. All this events can be described as overreaction. James Stewart’s influential personality may have changed the mentality of other eBay people more so investors. 3. In what ways are the events described at Intel and eBay similar and in what ways they are different? How did the stakeholders at Intel differ from the stakeholders at eBay? What about the market reaction to each stock? Find all the differences/similarities you can and try to explain if any of them were driven by behavioural effects (3 marks) There are similarities as well as differences in cases of Intel and that of eBay. In both cases, behavioural bias plays a major role. In the Intel’s case as well as in eBay’s case, hindsight bias is evident. In the former, hindsight bias is seen when the negative trend for the period of September 2000 through September 2002 is seen as a repeat of history. It is further expressed when Intel issued a press statement indicating that its revenue in the 3rd quarter would grow between three per cent and five per cent contrary to the analysts forecast of between eight to twelve per cent. This can be perceived to be an adjustment to suit the preferable outcome. In the latter hindsight bias is at play when eBay’s actual earnings for the 4th quarter of 2004 fell a penny below analysts’ consensus forecasts and subsequently eBay’s CEO stated that future earnings would be lower. Hindsight bias is however more evident in the former than in the latter. Another similarity is the presence of overreaction bias in both Intel and eBay whereby there is overreaction to bad news in both cases. In Intel the stock drops by 30% over thirty days after the announcement that growth would be between three and five per cent instead of the expected eight to twelve per cent. In eBay, overreaction is observed when analysts’ downgraded eBay’s stock soon after the stock price fell from 103 dollars to 81 dollars per share and the firms market value fell to 56billion dollars. The market reaction to each stock is similar in both cases, what could be as a result of behavioural effects as seen in the various instances in this essay. The status quo bias is also a shared by both cases. In the case of Intel, recommendation changes were extreme. This could be a tendency by the analysts to have the firm return to its original status. At eBay, status quo bias can be seen when Stewart acknowledged that eBay would not grow at a stratospheric rate forever noting that eBay has a natural monotony. In the case of eBay the January effect is evident whereby James Stewart said that he would opt to buy eBay stocks when they are on the decline, while in the case of Intel this anomaly is not observed. The other difference in the cases is the presence of an influential finance personality. James Stewart contributed towards bringing some of the biases through the media while the case at Intel is independent. WORKS CITED Fiscchoff,B & Beyth,R,.”I knew it would happen.” Remembered probability of once future things. Organizational behaviour and human performance 13(1975)1-16. Web. Eli,A and Yoav,G,. “Overreaction and under reaction in analysts forecasts”. Journal of economic behaviour & organization 37(1998)333-347. Web. Kahneman,D,. Jack L and Thaler,H. “Anomalies: The endowment effect, Loss aversion and staus quo bias.” The journal of economic perspectives5(1991)193-206. Web. Read More