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    Group 7 Conservatism Bias Chapter 11

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    ANISUR RAHMAN
    Conservatism bias is a mental process where people cling to prior views and forecasts instead of acknowledging new information. This bias causes people to underweight new evidence and can reinforce unwarranted optimism or pessimism. Research shows that investors sometimes underreact or overreact to financial news due to conservatism bias and representative heuristic. To overcome conservatism bias, investors must avoid clinging to past decisions and forecasts, be open to new information that impacts investments, and seek advice when unable to interpret complex new data.

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    Group 7 Conservatism Bias Chapter 11

    Uploaded by

    ANISUR RAHMAN
    138 views13 pages
    Conservatism bias is a mental process where people cling to prior views and forecasts instead of acknowledging new information. This bias causes people to underweight new evidence and can reinforce unwarranted optimism or pessimism. Research shows that investors sometimes underreact or overreact to financial news due to conservatism bias and representative heuristic. To overcome conservatism bias, investors must avoid clinging to past decisions and forecasts, be open to new information that impacts investments, and seek advice when unable to interpret complex new data.

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    Group 7 Conservatism Bias Chapter 11 (1)

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    Conservatism bias is a mental process where people cling to prior views and forecasts instead of acknowledging new information. This bias causes people to underweight new evidence and can reinforce unwarranted optimism or pessimism. Research shows that investors sometimes underreact or overreact to financial news due to conservatism bias and representative heuristic. To overcome conservatism bias, investors must avoid clinging to past decisions and forecasts, be open to new information that impacts investments, and seek advice when unable to interpret complex new data.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    138 views13 pages

    Group 7 Conservatism Bias Chapter 11

    Uploaded by

    ANISUR RAHMAN
    Conservatism bias is a mental process where people cling to prior views and forecasts instead of acknowledging new information. This bias causes people to underweight new evidence and can reinforce unwarranted optimism or pessimism. Research shows that investors sometimes underreact or overreact to financial news due to conservatism bias and representative heuristic. To overcome conservatism bias, investors must avoid clinging to past decisions and forecasts, be open to new information that impacts investments, and seek advice when unable to interpret complex new data.

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    of 13

    GROUP-07

    Conservatism Bias
    GROUP MEMBERS

    No. Name ID

    01 Md. Mahabub Miah B150203019

    02 Md. Nur Hossain B150203035

    03 Shimli Akter B150203036

    04 Sumaia Akter Jaly B150203049

    05 Anisur Rahman B150203056


    OVERVIEW

     Conservatism bias is a mental process in which people cling to their prior


    views or forecasts at the expense of acknowledging new information.
     This is a bias in human information processing. It says that people with
    this bias tend to underweight new evidence.
     It may Reinforce unwarranted optimism or pessimism.
     Conservatism bias may appear to conflict with representativeness bias; In
    representativeness bias, people over react to new information.
     People can actually exhibit both bias at the same time.
    EXAMPLES

     Financial analysts adjusting their previous estimates too slowly even on


    receiving new information.
     Investors underreact and delay the needs changes in their portfolio
    composition when the market situation has evolved.
    RESEARCH REVIEW

    In explaining investor behavior, Barberis, Vishny and Shleifer consist a model


    called
    “A Model of Investor Sentiment,” in 1997.
     This model is consistent with two important psychological theories:
     Conservatism
    Representative heuristic

     They argued that in some cases investors react too little to news and in
    other cases they react too much.
    RESEARCH REVIEW (CONT.)

    Investor Overreaction
    When a company announces good news over a period of three to five years
    (such as: Earnings reports that are consistently above expectation). After
    seeing this company’s earnings go up for several years in a row, investors
    believe that it is going to continue and overreact to such news. Like-
    I. Become excessively optimistic about the company’s prospects
    II. Trade its share more
    III. Pushing its stock price to un-naturally high levels.
    RESEARCH REVIEW (CONT.)

    Investor Underreaction
     Barberis, Vishny and Shleifer believe that investors sometimes also
    make the mistake of underreacting to certain types of financial news.
     Suppose a company announces a bad news ( it is cutting its dividend).
    Then the stock price should fall but it does not fall enough at the time of
    the announcement. Because the investors underreact to this news.
     Those investors are suffer from conservatism bias. For this reason,
    when they are faced with either good or bad announcement, they
    underreact to this news and only gradually incorporate its full import
    into stock price.
    RESEARCH REVIEW (CONT.)

    Researcher Advice For the Investors


    1. In the long run: It is better to invest value stocks, stock with low
    valuations (overreaction theory).
    2. In the short run: The best predictor of returns in the next six months is
    returns over the preceding six months(underreaction theory).
    CONSERVATISM BIAS TEST

    Question 1: When you recently hear news that has potentially negative
    implications for the price of an investment you own, what is your
    natural reaction to this information?

    a. I tend to ignore the information. Because I have already made the


    investment and I’ve already determined that the company will be successful.
    b. I will re-evaluate my reasoning for buying the stock and will decide based
    on an objective consideration of all the facts, what to do next.
    CONSERVATISM BIAS TEST(CONT.)
    Question 2: Suppose that you live in Baltimore and you make a forecast such as
    “I think it will be a snowy winter this year.” Furthermore suppose that, by mid-
    February, you realize that no snow has fallen. What is your natural reaction to this
    information?

    a. There’s still time to get a lot of snow, so my forecast is probably


    correct.
    b. My experience tells me that my forecast was probably incorrect.
    Most of the winter has elapsed; not much snow, if any, is likely to
    arrive now.
    HOW CAN CONSERVATISM BIAS IMPACT
    INVESTORS
     Investors too often given more attention to forecasted outcomes than to
    new data that actually describes emerging outcomes.
     Investors make irrational investment decision by clinging to old
    information subjectively.
     Investors have an underlying difficulty in processing new information.
    Because they experience mental stress when presented with complex data
    the easy way out is to simply stick to past decision.
    HOW TO OVERCOME CONSERVATISM
    BIAS
     Investors must avoid clinging to forecasts made on then available
    information.
     Investors must be open to receive and react decisively to new information
    that may materially impact investments.
     Investors should seek professional advice when they cannot interpret
    new, complex information.
    THANK YOU

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