Conservatism Bias

Conservatism bias is the tendency of an individual to stick to their initial views or forecasts whilst ignoring criticism of and inherent problems with conservatism, and not accepting new information. People are unreceptive to change and

this is due to human nature's preference to remain at the status quo and hence do not want to do anything that is out of the norm to upset their present way of life. This is so as it might mean that they have to abandon the initial money and effort they have put in, such as the sunk cost in investment, known also as the sunk cost fallacy. As a result, they are slow to react to potential trends accordingly until it becomes apparent to them, even though it would have been better if they have acted resolutely and take advantage of the new change in the first place.

In forex trading, conservatism bias affects an individual's decision in two ways. One is when there is an uptrend in the market but one cling to his personal belief that the uptrend is not normal and will eventually change, they end up missing on the opportunity of making profits when the uptrend persist. Secondly, when there is a downtrend in a market and one trades clinging to the belief that the market will eventually change due to past results, ends up making big loses because of their prior views. In both scenarios, the individual fails to take into consideration new information in his decision-making process, believing more in his prior judgement on the predicted market trend. Even when he does act, he does it slowly, requiring effort to absorb the new information available before him and thus all these results in trading miscalculations which could have been prevented.

To best overcome conservatism bias, an individual has to embrace new information and use it to his advantage. He shouldn't cling to his prior views and ignore new information. Doing so requires the new information to be reliable and accurate so that the individual can have the confidence and courage to make informed judgements on which way the market goes, even if it runs contrary to what he has predicted previously. So obtain your market information from various sources and not just simply sticking with your traditional information revenues such as 'advice' from self-proclaimed trading gurus. With the consistent information obtained from the wide-ranging sources, it would mean a clearer indicator on market trends and then the individual would be able to embrace the new information more readily, assessing his options and making a wiser choice in a decisive and confident manner.

Find out more about trading psychology and learn how forex trading success can be more about your mindset and less about the markets.

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