Hi, Might sound silly but I just started off my BF and while reading through the texts, I am baffled between the subject two biases. Can anyone explain me in details with relevant examples
Conservatism bias - don’t update views based on new information. For example, you classify ABC as a good growth stock, but new figures show all the signs of the company reaching the maturity stage (e.g. revenue not growing). You continuing classifying it as a growth stock. Hindsight bias - this warps your view of the past. You believe that past events could have been predicted and as a result unfairly blame others for losses and display overconfidence in your own abilities. For example, your fund loses 15% in 2008 and you fire all your analysts, stating that the signs of the crsis were obvious. You run the fund by yourself and tell investors you can enerate 10% consistently because you have a system that can eliminate future losses.
Agree, but in both cases as mentioned by you (The growth stock anchoring and the firing the analysts) fundamentally there is a PAST belief that is deeply entrenched in the mind, my qs. Is where lies the difference? how to tell one is different than other and in a particular situation the individual displays Conservatism bias and not Hind sight and vice versa?
In most of the biases there are past beliefs (status-quo bias and endowment bias come to mind). You have to think more specifically, ‘which bias based on past beliefs is it?’.
Hindsight bias is where the individual is thinking ‘I could have predicted that’, so in my first example they woudn’t ignore the slowing growth, they would have shouted at their analysts for not anticipating this.
Conservatism is about not updating beliefs, so someone displaying this bias wouldn’t have fired the analysts, they would just continue saying something like ‘house prices never go down’ ignoring the fact that house price falls were the catalyst for the crisis (everyone is the SE of England seems to have this bias).
This is how I remembered mate…
Conservatism - “I wont update my belief with new information” - Giving equal weightage to old and new information helps you here.
Hindsight - “Yeah I knew that and I did predict that” - Record keeping helps you here.
On that point, whenever you talk of a bias, talking of the remedy helps to get the concepts ironed out…
hmmm… Starting to make sense now. Could I summarize like this Conservatism: ‘Stuck in a graveyard yet calling it a bed of roses until the sky falls down on me’ Hindsight Bias ‘I know my way home and can predict that, thus ignoring all the other paths.’
I think with Hindsight Bias:
you would start off by not knowing your way home but made it home anyways and pointing to your wife and saying “see I have a good sense of direction.”
Conservatism = not to update the information available and use inadequate information so as to justify the assumptions made (such as consdering XYZ a growth stock)
Hindsight = Tendency to only remember recommendations which went right
Suppose I recommend A and B as growth stocks. Under conservatism, I would ignore information which suggests A to be a value stock and not a growth stock and continue to consider both as growth stocks. Hindsight bias is the situation wherein after a few years when I am proven wrong wrt A, I just remember that I recommended B as a growth stock (and forget about the mistake I made on A)