xiaoke20009, are you referring to conservatism bias? It’s a level III topic within behavioral finance and it’s not tested in level I. You don’t need to worry about that for Lvl I. It refers to a bias where someone is not open to adjusting prior beliefs after having received new market information. For example you initially believe that diet soft drinks do not make you fat. New evidence is presented that ties diet drink ingredients to weight gain. However you have conservatism bias and you do not want to weigh the new information, therefore you still believe that diet soft drinks do not contribute to making people fat.
That makes you rare amongst posters here. And all the more welcome.
A conservative bias recognizes less net income in the current period (using methods that recognize revenues late or expenses early) and, likely, more net income in future periods. If current (actual) earnings are higher than reported, there is a built-in cushion for providers of capital, such as bondholders.
Hi Analyst0718 - thanks for your help and the magician was right - I was referring to the bias in relation to being conservative about the current year earnings:)