Why do analysts struggle to model the downside?

  • Author:
    Geoff Robinson
  • Level:
    Intermediate to Advanced
  • Study time:
    Always adding content
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Course overview
Investment analysts often encounter difficulties in conceptualizing and modeling the downside in financial markets due to a confluence of psychological biases, structural impediments, and inherent uncertainties. The optimism bias and herd mentality can cloud judgment, leading analysts to underweight the potential for negative outcomes. Structurally, the reliance on historical data, which may not account for unprecedented future events or black swan occurrences, limits the predictive power of their models.

Moreover, the intricacies of global financial systems and the interplay of numerous variables create a complex adaptive system that is inherently difficult to predict. These factors, combined with the pressure to conform to consensus estimates, can result in a systematic underestimation of risk, making downside scenarios a particularly challenging aspect of financial analysis.

This research note delves into the cognitive and industry-specific factors that contribute to this modeling challenge, offering insights into why downside risks are often not fully captured by traditional analytical frameworks.

What's included?

  • Fundamental research written by Geoff Robinson
  • Analyst-curated insights
  • Embedded podcasts
  • Embedded videos
  • Downloadable models, where applicable

Who should read this?

This research note should be directed towards investment professionals, financial analysts, portfolio managers, risk managers, and strategic decision-makers within the finance industry. It could also be of interest to academic researchers studying behavioral finance and anyone keen on understanding the complexities of financial risk modeling.

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Geoff Robinson FCA FMVA MFM

Thought leader, instructor, writer, financial influencer, Former UBS Managing Director and 8x #1 ranked analysts EMEA Institutional Investor Survey
Geoff has had a varied career. He was a Managing Director within UBS Equity Research, leading their Global Fundamental Analytics franchise. During this time, he was #1, ranked 8x in the EMEA Institutional Investor Survey. Before UBS, he was a material equity investor and LBO co-investor in two market exited training consultancies. Geoff has a passion for learning and is well-known for his ability to break down complex subject matter and distil it to an audience in a digestible and engaging manner. He brings this passion to TheInvestmentAnalyst.com.