The way a company’s management presents (frames) information can influence how analysts interpret it and include it in their forecasts. There are three cognitive biases frequently seen when management reports company results: (1) framing, (2) anchoring and adjustment, and (3) availability.

Framing refers to a person’s inclination to interpret the same information differently depending on how it is presented. In the case of company information, analysts should be aware that a typical management report presents accomplishments first.

Anchoring and adjustment refers to being “anchored” to a previous data point. The way the information is framed (presenting the company’s accomplishments first), combined with anchoring (being overly influenced by the first information received), can lead to overemphasis of positive outcomes in forecasts.

Availability refers to the ease with which information is attained or recalled. The enthusiasm with which managers report operating results and accomplishments makes the information very easily recalled and, thus, more prominent in an analyst’s mind.

Analysts should also look for self-attribution bias in which management has overemphasized the positive as well as the extent to which their personal actions influenced the operating results leading to excessive optimism (overconfidence).

To help avoid the undue influence in management reports, analysts should focus on quantitative data that is verifiable and comparable rather than on subjective information provided by management. The analyst should also be certain the information is framed properly and recognize appropriate base rates (starting points for the data) so the data is properly calibrated.