Damodaran on Valuation

1.2. INSIDE THE VALUATION PROCESS

There are two extreme views of the valuation process. At one end are those who believe that valuation, done right, is a hard science, where there is little room for analyst views or human error. At the other are those who feel that valuation is more of an art, where savvy analysts can manipulate the numbers to generate whatever result they want. The truth does lies somewhere in the middle, and we use this section to consider three components of the valuation process that do not get the attention they deserve—the bias that analysts bring to the process, the uncertainty that they have to grapple with, and the complexity that modern technology and easy access to information have introduced into valuation.

1.2.1. Value First, Valuation to Follow: Bias in Valuation

We almost never start valuing a company with a blank slate. All too often, our views on a company are formed before we start inputting the numbers into the models that we use, and, not surprisingly, our conclusions tend to reflect our biases. We begin by considering the sources of bias in valuation and then move on to evaluate how bias manifests itself in most valuations. We close with a discussion of how best to minimize or at least deal with bias in valuations.

1.2.1.1. Sources of Bias

The bias in valuation starts with the companies we choose to value. These choices are almost never random, and how we make them can start laying the foundation for bias. It may be that we have read something ...