Renu is a 37-year-old entrepreneur with an eye for detail. She makes sure to do her homework before taking any decision and conducts intensive research before taking the final call. And this reflects in everything she does, even outside her work. When she teaches and helps her nine-year-old son with his studies, she first reads up on the topic herself. She finds out all the facts and then sits with her son. It helps her to prepare for any cross-questioning and boosts her confidence.
In her personal investments, Renu likes to be in charge as she trusts no one like she does her own research. She thoroughly goes through the financials of the companies she plans to invest in, looks at what the current market sentiments are and then, when she feels confident, she goes ahead with infusing funds into that scrip.
After following a stock for three months, Renu invested Rs 1,50,000. Her brother-in-law, Animesh, who is also an active investor, paid her a social visit. As always, the conversation eventually moved to, “What is the new stock that you bought?” Everyone in the family knows that Renu is an active investor, the topic of investments invariably comes up at family dinners. Renu told him about the new stock that she had invested in. Animesh expressed doubts and told Renu that the company had defaulted on a major regulation and it was likely to reflect on its stock price in the near future. Renu, however, simply smiled and said, “No, company’s financials are really good and it will outperform.” Animesh was not the one to give up easily, so he immediately went online and showed her the relevant news article. Renu quickly scanned through it and then showed him all the articles she had read about the company. She was sure that she had discovered a gem.
Animesh decided to keep his peace – on a previous occasion, when he had contradicted Renu’s opinions, the visit had not ended well. They had evening tea and Animesh departed. Renu wrote off the conversation, confident that she was right.
A month later, however, the stock did plummet and Renu lost 10% on her portfolio. If you closely look at how Renu operates, she does an in-depth study of the scrip before investing and after that, she does not accept any negative comments about the scrip, even if they came from an expert. Moreover, she also ignores any negative news about the company. She rules out the comments of anyone who advises against her choice. Essentially this means that if there is new information on the company which has implications on future market value of the scrip, Renu refuses to acknowledge that information. She pays no heed to it and continues to stay invested as per her original plan.
This is a classic case of conservatism bias.
Conservatism bias leads people to hold on to their previous views and ignore new information that comes their way. As a result of this bias, the investor does not account for changes in the financial market. When investing, it is important to keep abreast of new developments and changes in the market. It is also important to make changes to your portfolio in light of new information. Reassessing one ’s portfolio helps investors to meet their financial goals and also contributes to enhancing their financial satisfaction. However, conservatism bias often leads to underreaction and lack of action when negative information comes your way. An investor with this bias continues to act as per their previous ideas. In an ever-changing financial market landscape, investors routinely navigate uncertain waters, looking to secure their financial future amid economic ups and downs. Like sailors navigating dangerous islands, investors face countless challenges and pitfalls on their journey.
One such challenge is the ever-changing nature of the market. Conservatism bias, which is deeply ingrained in human psychology and can have a significant impact on investment decisions. Born from an innate desire for perceived ease and confirmation, conservatism bias forces investors to stubbornly cling to their initial beliefs, even in the face of contradictory evidence. This reluctance to adapt can lead to missed opportunities, underperforming portfolios, and financial losses.
As investors, you need to do all the research required before making an investment decision but it is also important to be willing to reassess your decision and make the required amends when the situation changes.
Let us look at the dangers of conservatism bias through the eyes of Anushree who is a seasoned sailor and captain of the ship the Golden Portfolio, sailing through an archipelago in the ocean.
Anushree is in the high seas and her map indicates the existence of a habitable island, and the coordinates that it can be found at. She has heard stories about the island and had visited it once, more than a decade ago. She has fond memories of the island; a clean beach, coconut trees and a hospitable native tribe living there. Anushree is looking forward to her visit this time. It is late July and the weather forecast mentions a storm in the next few hours. Anushree is planning to reach the island just in time to miss the storm. Her plan is to dock at the island and enjoy the cool breeze for two days. This will also be enough time for the storm to pass.
The ship is almost at the island and they can see the storm in the distance, approaching them fast. It is imperative that Anushree dock the ship in order to save her crew and the cargo, as the ship is not robust enough to handle the gravity of the expected storm. When she reaches the coordinates, sure enough, the island is there.
But there is no way to anchor the ship there. The beach is rocky and unapproachable, and not how she remembered it. Her memories are at least ten years old. She considers anchoring the ship at some distance and going to the island on the lifeboat. However, the rocky terrain and waves meant that even that was out of the question. Anushree had once docked at this island and was very sure that they could get all the way up into the island. She starts steering around the island in search of a place to drop anchor.
Her crew are now warning her of the approaching storm and advises her to try and make it to another island nearby. The crew has done some calculations and has concluded that if they move now they will be able to reach the other island well in time to survive the storm. Anushree is the captain and refuses to listen to her crew. She is adamant that she can find a docking spot on the island. She ignores the crew’s warnings and wastes time. This results in the ship getting caught in the middle of the storm. The ship incurs heavy losses even if there is no loss of life.
Excerpted with permission from How Women Invest in a Man’s World, Jyoti Mehndiratta Kappal, Bloomsbury India.
