Michael Mauboussin: How Well Do You Compare?

Michael Mauboussin now writes for Blue Mountain Research. His latest piece explores how we make comparisons. He explores the mistakes we make in comparing and looking for analogies. For example, an analyst may consider her own experience when evaluating a deal with familiar characteristics. That would be a "lack of breadth" mistake because the comparison fails to consider the larger sample of similar deals.

Mauboussin also focuses on a common valuation tool, the comparable company or peer group analysis. He explores several 

When researchers examined how analysts actually select companies for comparison, they found that analysts pick peers with high valuations when they want to argue that a stock is cheap. It appears that the comparable company analysis is less an exercise in objectivity and more an exercise in persuasion.

Link to the full paper:
Michael Mauboussin: How Well Do You Compare?

Comparing, essential to effective decision making, comes naturally to humans. But our basic approach of relying on analogy can limit our ability to compare effectively. In particular, we fail to incorporate sufficient breadth and depth into our comparisons, and we can be easily swayed by the presentation of information or the allocation of our attention. 

 

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