Behavioral Finance and Your Portfolio

4Belief Perseverance Bias #2: Conservatism Bias

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight, or inside information. What's needed is a sound intellectual framework for decisions and the ability to keep emotions from corroding that framework.

—Warren Buffett

Bias Description

Bias Name: Conservatism

Bias Type: Cognitive

Subtype: Belief perseverance

General Description

Conservatism bias is a mental process in which people cling to their prior views or forecasts at the expense of acknowledging new information. For example, suppose that an investor receives some bad news regarding a company's earnings and that this news negatively contradicts another earnings estimate issued the previous month. Conservatism bias may cause the investor to underreact to the new information, maintaining impressions derived from the previous estimate rather than acting on the updated information investors persevere in a previously held belief rather than acknowledging new information; this is again a variation on the cognitive dissonance theme described in the last section.

Example of Conservatism Bias

James Montier is author of the book Behavioural Finance: Insights into Irrational Minds and Markets¹ and an analyst for DKW in London. Montier has done some exceptional work in the behavioral finance field. Although Montier primarily studied the stock market in general, concentrating on the behavior of securities analysts in particular, ...