Big Idea by Roger Martin

Roger Martin

Distinguishing between Expectations and Reality – Most people believe that a stock price is something real that it’s based on the earnings of the company and the numbers of the company.  It is not.  It is the sum of all the expectations of people watching the company about its future.  That is why companies can’t beat their expectations forever, and that is why stock prices go up for periods. Even if the company is still performing well, it will plummet and this creates havoc in the market.  It also is why stock-based compensation which rewards increasing expectations rather than rewards increasing real performance. This is bad for companies and bad for the economy and actually should be banned, and that’s because we should be focusing on making companies better not on manipulating the expectations about the future of companies.

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