Psychology and Financial Statement Analysis: How Can Analysts Avoid the Pitfalls?

What are the psychological pitfalls that analysts should avoid when evaluating financial statements? This article describes a list of ten major pitfalls and proposes that disciplined processes be installed to mitigate them. Checklists, scorecards, and pre-articulated procedures add value by disciplining the analyst to resist pitfalls like over-confidence, narrow framing, and anchoring bias, and to assess based on the agreed-upon criteria. Such discipline improves the chances of achieving consistent, reproducible, and scalable results across trades and over time.