Behavioral Finance and Your Portfolio. Michael M. Pompian

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      1 Conservatism bias can cause investors to cling to a view or a forecast, behaving too inflexibly when presented with new information. For example, assume an investor purchases a security based on the knowledge that the company is planning a forthcoming announcement regarding a new product. The company then announces that it has experienced problems bringing the product to market. The investor may cling to the initial, optimistic impression of some imminent, positive development by the company and may fail to take action on the negative announcement.

      2 When conservatism-biased investors do react to new information, they often do so too slowly. For example, if an earnings announcement depresses a stock that an investor holds, the conservative investor may be too slow to sell. The pre-existing view that, for example, the company has good prospects, may linger too long and exert too much influence, causing an investor exhibiting conservatism to unload the stock only after losing more money than necessary.

      3 Conservatism can relate to an underlying difficulty in processing new information. Because people experience mental stress when presented with complex data, an easy option is to simply stick to a prior belief. For example, if an investor purchases a security on the belief that the company is poised to grow and then the company announces that a series of difficult-to-interpret accounting changes may affect its growth, the investor might discount the announcement rather than attempt to decipher it. More clear-cut and, therefore, easier to maintain is the prior belief that the company is poised to grow.

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

      2 There still may be time for some snow, but I may have erred in my forecast.

      3 My experience tells me that my forecast was probably incorrect. Most of the winter has elapsed; therefore, the cumulative amount of snow is not likely to be significant.

      1 I tend to ignore the information. Because I have already made the investment, I've already determined that the company will be successful.

      2 I will reevaluate my reasons for buying the stock, but I will probably stick with it because I usually stick with my original determination that a company will be successful.

      3 I will reevaluate my reasoning for buying the stock and will decide, based on an objective consideration of all the facts, what to do next.

      1 I usually wait for the market to communicate the significance of the information and then I decide what to do.

      2 Sometimes, I wait for the market to communicate the significance of the information, but other times, I respond without delay.

      3 I respond without delay.

      1 1 James Montier, Behavioural Finance: Insights into Irrational Minds and Markets (West Sussex, England: John Wiley & Sons, 2002).

      2 2 James Montier, “Equity Research” (research report, Dresdner Kleinwort Wasserstein, 2002).