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
This week we are going to take a look at what is called Conservatism Bias. Conservatism bias is a mental process in which people maintain their past views or predictions at the cost of recognizing new information.
For example, have you ever done a ton of research and identified and booked the perfect beach rental for a family vacation months in advance? However, as the vacation approaches you learn that a category-five hurricane is set to make landfall directly on top of your condo. You know that you should cancel the trip given this new information, but part of you wants to head down to Destin anyway, right? The urge is so strong, that you might even load up the car and plan to still go “unless things look REALLY bad.” The great decision that you made months ago by booking an awesome condo in a pristine location is clouding your judgement given the new information. This isn’t your fault; it’s human nature, and it can be a real danger in the investment world.
So what exactly does this mean for investors? According to Michael M. Pompian, author of Behavioral Finance and Wealth Management, Investors with this bias can make investment mistakes such as:
Pompian goes on to say that “Conservatism can prevent good decisions from being made, and investors need to remain mindful of any propensities they might exhibit that make them cling to old views and react slowly toward promising, emerging developments.”
Duncan Williams Asset Mgmt. is here to offer you professional advice to help you avoid the pitfalls of this common bias. Let us help you avoid the hurricane!