Another question on conservatism and anchoring

CFA Level III Portfolio Management
#1

I have searched the forum and did find some dicussion about the two but I still don’t get the point, particular when I am trying to solve the following question in schweser:

Don Henry has just received new information regarding his investment in Orange, Inc. The new information appears to conflict with his earlier forecast of what the stock price should be at this point. Nonetheless, he is unwilling to incorporate the new information into his forecast and to revise it accordingly. What behavioral trait is Henry displaying? A. Conservatism bias. B. Confirmation bias. C. Anchoring and adjustment. The answer is A. But why? I read the solution and CFAI text but I’m still confused.

#2

Conservatism Bias = Overweight Old Infomration + Underweight ( or Ignore) New Information

#3

Further:

Confirmation Bias: look for new information that supports your position, or adjust (spin) new information to support your position. Henry has done neither.

Anchoring and Adjustment: set a goal, then adjust that goal based on new information. Henry isn’t adjusting for the new information; he’s ignoring it.

#4

Don is neither “anchoring on” nor “confirming” the new info. He is “conservatively” ignoring the new info.

#5

I think this can be interpreted as anchor and adjustment bias:

He has an anchor, the initial forecast of the stock price. Then he just made insufficient adjustment to that forecast (anchor).

The two biases are just so similar

#6

“Nonetheless, he is unwilling to incorporate the new information into his forecast and to revise it accordingly.”

He made no adjustment at all. That’s the point.

#7

In CFAI’s example illustrating anchoring and adjustment, the FMPs estimated the EPS of a company to be $2 and remained anchored to the $2 forecast even if the company had difficulties during the year.

In other words, the FMPs made no adjustment at all and it’s still called anchoring and adjustment bias. No adjustment at all is a kind of ‘insufficient adjustment’. This is why it’s particuarly confusing.

#8

In the example from CFA Institute that you cite, do they ponder the information (“company has difficulties”) and decide that it warrants no change, or do they ignore the information?

Here, there is no pondering. Anchoring and adjustment requires that you get new information, consider it, and decide how that will affect your original assessment. Here, we don’t have a case where Henry incorporates the new information and decides that it doesn’t affect his original assessment; here, Henry refuses to incorporate the information. The former would be classified as Anchoring and Adjustment; the latter is Conservatism.

I agree that the difference is subtle. You have to ask whether he uses the information and it makes no difference, or he doesn’t use the information.

#9

Thanks for your input S2000magician. I think I understand more about your point now.

I really have no idea. I copy the text as follows (with the hope that there’s no copyright or whatever problem)

“As a result of anchoring and adjustment bias, FMPs may stick too closely to their original estimates when new information is learned. For example, if the FMP originally estimates next year’s earnings for a company as $2.00 per share and the company experiences difficulties during the year, FMPs may not adequately adjust the $2.00 estimate given the difficulties. They remain “anchored” to the $2.00 estimate.” It seems there’s no clue about whether the FMPs ponder or not.

#10

My pleasure.

I’d take the highlighted portion to mean that they considered the difficulties (i.e., pondered), and decided to make no adjustment.

Again, I agree that it’s subtle.