flip of a coin : In fact, even if you were the CEO yourself, your forecasts
would not be impressively reliable; the extensive research on insider
trading shows that executives do beat the market when they trade their
own stock, but the margin of their outperformance is barely enough to
cover the costs of trading. See H. Nejat Seyhun, “The Information Content
of Aggregate Insider Trading,” Journal of Business 61 (1988): 1–24; Josef
Lakonishok and Inmoo Lee, “Are Insider Trades Informative?” Review of
Financial Studies 14 (2001): 79–111; Zahid Iqbal and Shekar Shetty, “An
Investigation of Causality Between Insider Transactions and Stock
Returns,” Quarterly Review of Economics and Finance 42 (2002): 41–57.
In Search of Excellence: Rosenz {lenlatweig, The Halo Effect.
“Most Admired Companies” : Deniz Anginer, Kenneth L. Fisher, and Meir
Statman, “Stocks of Admired Companies and Despised Ones,” working
paper, 2007.
regression to the mean : Jason Zweig observes that the lack of
appreciation for regression has detrimental implications for the recruitment
of CEOs. Struggling firms tend to turn to outsiders, recruiting CEOs from
companies with high recent returns. The incoming CEO then gets credit, at
least temporarily, for his new firm’s subsequent improvement. (Mean-while,
his replacement at his former firm is now struggling, leading the new
bosses to believe that they definitely hired “the right guy.”) Anytime a CEO
jumps ship, the new company must buy out his stake (in stock and options)
at his old firm, setting a baseline for future compensation that has nothing
to do with performance at the new firm. Tens of millions of dollars in
compensation get awarded for “personal” achievements that are driven
mainly by regression and halo effects (personal communication,
December 29, 2009).

20: The Illusion of Validity

this startling conclusion : Brad M. Barber and Terrance Odean, “Trading Is
Hazardous to Your Wealth: The Common Stock Investment Performance of
Individual Investors,” Journal of Finance 55 (2002): 773–806.
men acted on their useless ideas : Brad M. Barber and Terrance Odean,
“Boys Will Be Boys: Gender, Overconfidence, and Common Stock
Investment,” Quarterly Journal of Economics 116 (2006): 261–92.
selling “winners” : This “disposition effect” is discussed further.
responding to news : Brad M. Barber and Terrance Odean, “All That
Glitters: The Effect of Attention and News on the Buying Behavior of
Individual and Institutional Investors,” Review of Financial Studies 21
(2008): 785–818.