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Calculators, Lemmings or Frame-Makers? The Intermediary Role of Securities Analysts

As Wall Street specialists in valuation, sell-side securities analysts constitute a particularly important class of market actor. Analysts produce the reports, recommendations and price targets that professional investors utilize to inform their buy and sell decisions, which means that understanding analysts’ work can provide crucial insights on the determinants of value in the capital markets. Yet our knowledge of analysts is limited by insufficient attention to Knightian uncertainty. Analysts estimate the value of stocks by calculating their net present value or by folding the future back into the present. In so doing, they are faced with the fundamental challenge identified by Frank Knight, that is, with the difficulty of making decisions that entail a future that is unknown. These decisions, as Knight wrote, are characterized by ‘neither entire ignorance nor complete . . . information, but partial knowledge’ of the world (Knight, [1921] 1971: 199). The finance literature has not examined the Knightian challenge faced by analysts. Indeed, existing treatments circumvent the problem by adopting one of two extreme positions. In the first, put forward by orthodox economists, it is assumed that Knightian uncertainty is non-existent and that calculative decision-making is straightforward. Analysts are presented as mere calculators in a probabilistic world of risk (Cowles, 1933; Lin and McNichols, 1998; Lim, 2001). In the second, put forward by neo-institutional sociologists and behavioural finance scholars, analysts face too much uncertainty to engage in individual calculation. Analysts confront this uncertainty by resorting to a lemming-like imitation of their colleagues’ opinions (see respectively Rao, Greve and Davis, 2001; Scharfstein and Stein, 1990; Hong, Kubik and Solomon, 2000). None of these views, however, examines the Knightian challenge that analysts confront, namely, the imperative to decide with a significant but limited knowledge of the world. In recent years, an emerging sociological literature has begun to redress this neglect of Knightian uncertainty by viewing analysts as critics. According to the