Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

2.Delinkvaluationsfromreward/punishment.Anyvaluation
processwheretherewardorpunishmentisconditionalonthe
outcomeofthevaluationwillresultinbiasedvaluations.In
otherwords,ifwewantacquisitionvaluationstobeunbiased,
we have to separate the deal analysis from the deal making.


3.Noprecommitments.Decisionmakersshouldavoidtaking
strong public positions on the value of a firm before the
valuationiscomplete.Anacquiringfirmthatcomesupwitha
pricepriortothevaluationofatargetfirmhasputanalystsin
anuntenablepositioninwhichtheyarecalledupontojustify
thisprice.Infartoomanycases,thedecisiononwhethera
firm is undervalued or overvalued precedes the actual
valuation, leading to seriously biased analyses.


4.Self-awareness.Thebestantidotetobiasisawareness.An
analystwhoisawareof thebiases he orshebringsto the
valuation process can either actively try to confront these
biaseswhenmakinginputchoicesoropentheprocessupto
more objective points of view about a company’s future.



  1. Honest reporting. In Bayesian statistics, analysts are
    required to reveal their priors (biases) beforethey present
    theirresultsfromananalysis.Thus,anenvironmentalistwill
    havetorevealthatheorshestronglybelievesthatthereisa
    holeintheozonelayerbeforepresentingempiricalevidence
    tothateffect.Thepersonreviewingthestudycanthenfactor
    that bias in while looking at the conclusions. Valuations
    wouldbemuchmoreusefulifanalystsrevealedtheirbiases
    up front.


Whilewecannoteliminatebiasinvaluations,wecantryto
minimizeitsimpactbydesigningvaluationprocessesthatare

Free download pdf