BP: "Incompetence, uncertainty and risk" (among securities analysts)

The first half of analyst tells you where their heads are at.
The stock is down six bits at $29.58.

When we posted "Trading on the ‘Top Kill’: Analyst Thoughts" (BP; RIG), I said:

The stock is up $2.75 at $45.16 and I wouldn't touch it with your money. Fiduciary blah blah, Prudent Man, raw terror etc.
Personally we're partial to the play in "Website Offers Betting on Spill-Related Extinctions of Gulf Species ".

Here's Abnormal Returns:

Aaron Pressman at Reuters had a piece last week that looked at how to a man the analysts covering BP (BP) in the aftermath of the Deepwater Horizon disaster could have gotten things so wrong.  As oil spilled into the Gulf and the company’s stock continued to plummet the vast majority of analysts continued to rate the company a “Buy.”  It wasn’t until June that many analysts began downgrading the stock.  Pressman writes:

How could so many analysts have gotten the call so wrong? Of course, to err is human. And Wall Street is also prone to herd-like tendencies. But some experts say the unanimity of error around the BP blow-up also has exposed — yet again — the conflicts and weaknesses that still bedevil the sell-side analyst community, despite a decade of much-heralded reform.

Then again, we probably shouldn’t be all that surprised by this.  The sell-side has been a topic of derision ever since the bursting of the Internet bubble.  Felix Salmon also at Reuters writes:

Sell-side analysts live in mediocristan, and are prone to being blindsided by the unexpected; they almost never, for instance, recommend negative-carry trades. Investors, if they’re any good, know this. No one ever made money by blindly following sell-side advice, and so we should hardly be surprised that people whose position coincided with the sell-side consensus ended up losing a lot.

However this case is a good illustration of something else:  the Dunning-Kruger effect.*  To wit:

When people are incompetent in the strategies they adopt to achieve success and satisfaction, they suffer a dual burden: Not only do they reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the ability to realize it.

Errol Morris writing at the New York Times has a piece well worth reading exploring this effect, including an interview with David Dunning....MORE