Conservatism Bias Research Articles

Conservative Bias and Endowment Effect in Investment Decision-Making Process: Development and Validation of Scale

Objective: This work aims to investigate two biases - conservatism and endowment effect - to then build an instrument capable of measuring them. Theoretical Framework: The advancement of studies in behavioral finance has led to the conclusion that individuals evaluate their gains and losses based on individual references. Thus, the perception from which they make decisions is individual and, therefore, subjective. Method: Based on a literature review, the main characteristics of both biases were collected and then a questionnaire was applied to a sample of 150 managers. The data collected from the answers to the questionnaire were subjected to exploratory factor analysis and Cronbach reliability test. Results and Discussion: The findings of this research highlighted three components to the conservatism bias. These components are: Conservatism in investment decisions, Conservatism and security, Conservatism in financing decisions. For the endowment effect, a component was identified and named with the same name as the effect. Research Implications: The indicators of the factor Conservatism in Investment Decisions show that managers are attached to information and past situations, so that they feel uncomfortable in the face of new scenarios. The indicators Conservatism and security and Conservatism in financing decisions indicated the preference for safer investments. The endowment effect indicators were lower, however, they were still able to highlight the indirect influence on the managers in the sample. This problem may arise from the nature of the assets managed by managers, in which established ownership is not perceived. Originality/Value: This study contributes to the literature by develop an instrument capable of identifying and measuring the conservatism and endowment effect biases of managers to pave the way for a discussion about the topic.

Associations of conservatism and jumping to conclusions biases with aberrant salience and default mode network.

While conservatism bias refers to the human need for more evidence for decision-making than rational thinking expects, the jumping to conclusions (JTC) bias refers to the need for less evidence among individuals with schizophrenia/delusion compared to healthy people. Although the hippocampus-midbrain-striatal aberrant salience system and the salience, default mode (DMN), and frontoparietal networks ("triple networks") are implicated in delusion/schizophrenia pathophysiology, the associations between conservatism/JTC and these systems/networks are unclear. Thirty-seven patients with schizophrenia and 33 healthy controls performed the beads task, with large and small numbers of bead draws to decision (DTD) indicating conservatism and JTC, respectively. We performed independent component analysis (ICA) of resting functional magnetic resonance imaging (fMRI) data. For systems/networks above, we investigated interactions between diagnosis and DTD, and main effects of DTD. We similarly applied ICA to structural and diffusion MRI to explore the associations between DTD and gray/white matter. We identified a significant main effect of DTD with functional connectivity between the striatum and DMN, which was negatively correlated with delusion severity in patients, indicating that the greater the anti-correlation between these networks, the stronger the JTC and delusion. We further observed the main effects of DTD on a gray matter network resembling the DMN, and a white matter network connecting the functional and gray matter networks (all P < 0.05, family-wise error [FWE] correction). Function and gray/white matter showed no significant interactions. Our results support the novel association of conservatism and JTC biases with aberrant salience and default brain mode.

Konservatisme Akuntansi Sebagai Strategi Adaptif Perusahaan Manufaktur dalam Menghadapi Ketidakpastian: Sebuah Sintetik Analitik

This study aims to examine and identify the results of research on the application of the principle of accounting conservatism in manufacturing companies in Indonesia. The method used as an analytical tool is a meta synthesis of several research findings on accounting conservatism in Indonesia. The results of this study explain the importance of the principle of conservatism in directing companies to be more careful in the measurement of profits, assets, and recognition of potential losses. The weakness of accounting conservatism can lead to underreported earnings, can inhibit innovation, and can reduce transparency. The high level of application of the principle of accounting conservatism can lead to conservatism bias. Conservatism bias can be overcome by the way, companies must make an objective assessment of uncertain financial information. Then, the company must apply the principle of conservatism consistently over time.

Cognitive biases, downside risk shocks, and stock expected returns

This paper finds that the pricing effect of past stock downside risks in stock markets is greatly influenced by two cognitive biases: the representativeness heuristic bias and the conservatism bias. The two cognitive biases can cause investors to misreact to past downside risks of stocks, resulting in abnormal returns. Using the pseudo-Bayesian model, we theoretically describe how investors' incorrect belief updates, influenced by two cognitive biases regarding downside risks of a stock, affect future stock returns under four scenarios. Our empirical analysis confirms that biased beliefs lead to a positive correlation between short-term downside risk shocks and future stock returns, while a negative correlation exists between long-term downside risk shocks and future stock returns. This phenomenon is prevalent in the Chinese A-share market, even after controlling for several commonly used firm characteristics. Similar results are also observed in the US stock market. Furthermore, more active retail investors and low investor sentiments can strengthen the anomalous relation.

No evidence of biased updating in beliefs about absolute performance: A replication and generalization of Grossman and Owens (2012)

Many studies report that following feedback, individuals do not update their beliefs enough (a conservatism bias), and react more to good news than to bad news (an asymmetry bias), consistent with the idea of motivated beliefs. In the literature on conservatism and asymmetric updating, however, only one prior study focuses on judgments on absolute performance (Grossman & Owens, 2012), which finds that belief updating is well described by the Bayesian benchmark in that case. Here, we set out to test the replicability of these results and their robustness across several experimental manipulations, varying the uncertainty of participants’ priors, the tasks to perform, the format of beliefs and the elicitation rules used to incentivize these beliefs. We also introduce new measures of ego-relevance of these beliefs, and of the credibility of the feedback received by participants. Overall, we confirm across various experimental conditions that individuals exhibit no conservatism and asymmetry bias when they update their beliefs about their absolute performance. As in Grossman & Owens (2012), most observations are well-described by a Bayesian benchmark in our data. These results suggest a limit to the manifestation of motivated beliefs, and call for more research on the conditions under which biases in belief updating occur.

Understanding Momentum and Reversal Investing Strategies

Momentum and reversals are two phenomena to explain the past return trend. Originally introduced by Jegadeesh and Titman in 1993, momentum is now a common investment strategy when investors are trading securities. It points out the stock price may have a relationship with their past performance. A large number of researchers have been trying to find out the momentum investment effect based on empirical evidence in different markets in different investment periods, which include short term, medium term and long term. Moreover, a series of research concludes that the momentum investment strategy tends to help investors to get a higher return. In recent years, a large number of researchers have focused more on analysing financial markets in China, and they have paid more attention to improving the traditional Jegadeesh and Titman models. In addition, an increasing number of researchers also point out that noise trading is quite important in the security investment strategy, and the investors who are using a momentum investment strategy to trade their portfolios are supposed to take the noise trading strategy into consideration. Then a series of papers have been tried to explain the sources of the momentum effect, either risk-based or behavioural-based. When it assumes that the market is efficient, the past market prices could be reflected, and it is hard to get excess returns by observing the stock's past prices performance. Nevertheless, the momentum effect is likely to examine that the market is inefficient. When it tries to explain the momentum effect in risk-based sources, the abnormal price return may be derived from a risk that is undiversifiable. As for the behaviour-based explanation, several behavioural biases applied by different researchers could be used to study the momentum effect, such as cognitive errors, including the conservatism bias, the representative bias, and the emotional bias, including the loss aversion bias, the overconfidence bias and the self-attribution bias. Another possible explanation within this behavioural source is that overreaction to the news leads to the existence of price momentum.

Indonesian Stock Market Return Volatility and Foreign Portfolio Capital: Evidence Before and During Covid-19 Pandemic

The Covid-19 pandemic increased uncertainty in the Indonesian stock market. This paper aims to investigate foreign and domestic investors' behavior in the Indonesian stock market, especially during the Covid-19 pandemic. The method used was E-GARCH and DCC-GARCH. The results showed that the impact of shocks from bad and good news was greater on the return volatility during the pandemic. The shocks had a positive impact on the increase in the spillover effect of NFI's volatility to return volatility in the short and long term before the pandemic, but this did not happen during the pandemic. There is an indication of bias of forecasting errors and prospect theory in the behavior of investors in the Indonesian stock market. Conservatism bias is also indicated in the behavior of foreign investors. Keywords: Covid-19, E-GARCH, DCC-GARCH, net foreign inflow, return volatility

Predicting the financial behavior of Indian salaried-class individuals

COVID-19 has caused not only unprecedented health crises but also economic crises among individuals across the world. White-collar (salaried-class) employees with a fixed salary face financial insecurity due to job loss, pay cuts and uncertainty in retaining a job. This study examines the financial behavior of Indian white-collar salaried-class investors to their cognitive biases. In addition, the mediating effect of financial self-efficacy on cognitive biases and financial behavior is examined. Respondents were given structured questionnaires (google forms) through emails and WhatsApp for data collection. SPSS and R-PLS are used to analyze the data. Conservatism (r = –.603, p &amp;amp;lt; 0.05) and herding bias (r = –.703, p &amp;amp;lt; 0.05) have a significant negative correlation with financial behavior. Financial self-efficacy has a significant positive correlation (r =.621. p &amp;amp;lt; 0.050). Conservatism and herding predicted 60.5% and 62.2% of the variance, respectively. The direct and indirect paths between conservatism bias, financial self-efficacy, and financial behavior are significant. The paths between herding, financial self-efficacy and financial behavior are also significant. Acknowledgement The authors express their sincere gratitude to Dr Suresha B (Associate Professor, School of business and management, CHRIST (Deemed to be university), Bangalore, India ) for encouraging and motivating them to accomplish this research task. The authors also extend their sincere thanks to Prof. Krishna T.A. (Assistant Professor, School of business and management, CHRIST (Deemed to be university), Bangalore, India) and Dr Sridevi Nair (Assistant Professor, School of business and management, CHRIST (Deemed to be university), Bangalore, India) for their support throughout this empirical investigation.

Toxic Expectations: Analyst Forecasts and Firm Pollution

Firm pollution can reduce firm earnings as a result of regulatory costs or reduced consumer demand; effective security research should consider such private costs when predicting the profitability of polluters. However, due to anti-polluter sentiment, investor environmental, social, and governance (ESG) preferences, and security analyst behavioral biases, I hypothesize that analysts may consistently overestimate the private costs of pollution and subsequently undershoot in their earnings forecasts for polluters. Consistently, this study finds evidence of systematic pessimism in analyst forecasts for polluting firms, a one standard deviation increase in emissions is associated with a 1.3% increase in forecast error. This polluter pessimism is stable in magnitude from 1987 to 2017. Furthermore, this research shows that biases toward polluters are sticky, consistent with the conservatism bias. Analysts who are ex ante biased toward polluters continue to hold those biases ex post, even after recent earnings announcements prove them wrong.

Vieses Comportamentais e a Tomada de Decisão em Empreendedores e Gestores

ABSTRACT Objective: the present research aims to understand the role of behavioral biases present in the investment decision in entrepreneurs and managers, in the light of the behavioral finance. Theoretical approach: Considering that non-financial aspects influence the decision making of investments in real assets, the present research focuses on how individual characteristics, notably behavioral biases, can affect these investment decisions, from the perspective of Behavioral Finance. Method: a qualitative research was developed. Interviews were held with eight managers or entrepreneurs who usually make investment decisions in real assets within their organizations. Interviews were transcribed and content analysis was used to analyze the data. Results: findings suggest the presence of behavioral biases in the decision-making presented by the interviewees, specifically the optimism and overconfidence, loss aversion, self-attribution, sunk cost, endowment effect, regret, conservatism, and external agent effect. Optimism, overconfidence, and loss aversion were present in all the interviewees’ speeches. Regret and external agent effect emerged in entrepreneurs’ speech while conservatism bias emerged in the speech of managers. Conclusions: entrepreneurs and managers indistinctly presented behavioral biases; however, the triggers for those biases are diverse. When it refers to insecurity in deciding, entrepreneurs allow themselves to question their own decision-making ability, by either regret or consulting an external agent, while managers hold themselves in conservative decisions.

Political Orientation as Psychological Defense or Basic Disposition? A Social Neuroscience Examination

Psychological views on political orientation generally agree that conservatism is associated with negativity bias but disagree on the form of that association. Some view conservatism as a psychological defense that insulates from negative stimuli and events. Others view conservatism as a consequence of increased dispositional sensitivity to negative stimuli and events. Further complicating matters, research shows that conservatives are sometimes more and sometimes less sensitive to negative stimuli and events. The current research integrates these opposing views and results. We reasoned that conservatives should typically be less sensitive to negative stimuli if conservative beliefs act as a psychological defense. However, when core components of conservative beliefs are threatened, the psychological defense may fall, and conservatives may show heightened sensitivity to negative stimuli. In two ERP studies, participants were randomly assigned to either an ostensibly real economic threat or a nonthreatening control condition. To measure reactivity to negative stimuli, we indexed the P3 component to aversive white noise bursts in an auditory oddball paradigm. In both studies, the relationship between increased conservatism and P3 mean amplitude was negative in the control condition but positive in threat condition (this relationship was stronger in Study 2). In Study 2, source localization of the P3 component revealed that, after threat, conservatism was associated with increased activity in the anterior cingulate cortex and dorsomedial prefrontal cortex, regions associated with conflict-related processes. These results demonstrate that the link between conservatism and negativity bias is context-dependent, i.e., dependent on threat experiences.

Perilaku Investor Dalam Transaksi Saham di Pasar Modal

This study aims to analyzing the behavior of Palembang investors through cognitive biases and emotional biases that impacting investor’s decision making on stock transaction in the capital market. This decision making proxied by cognitive biases, there are overconfidence bias, represtentativeness bias, anchoring and adjustment bias, availability bias, illusion of control bias, and conservatism bias, also proxied by emotional biases there are self-control bias, optimism bias, loss aversion bias, dan status quo bias. The population of the study are investors whom became partners of securities, those listed in Indonesian Stock Exchange and the securities which stand only in Palembang region. There are 50 investors as sample of this study with purposive sampling as sampling method. The type data of this study is qualitative and the resources of data in this study is primary data with distributing questionnaire. Analyzing method in this study using multivariate analysis Structural Equation Model (SEM) and the result of this study shows that availability bias, conservatism bias, and loss aversion bias have significance effect to Palembang investor’s decision making in 2020. For future research could be able to take other samples from another big cities, as well as conducted research on the relationship between behavioral biases and financing or behavioral biases and health that including demographics and etc.

Investigating the Demographic Characteristics of Institutional Investors Affecting Representativeness, Conservatism and Overconfidence Biases in their Individual Investments

This study aims to identify the factors affecting representativeness, conservatism, and overconfidence biases in a sample of Turkish institutional investors. In difference to other studies, especially the individual investments of institutional investors in capital markets are focused on. The respondents who are selected with the method of convenience sampling are asked survey questions. In the study, models are formed with the stepwise method using linear regression analysis, and survey questions that are assumed to represent the examined biases are selected as the dependent variable. The age, gender, marital status, education, whether or not having children, and experience of institutional investors are included in the analysis as the independent variables. This way, which of the independent variables that are found to be statistically significant and the subcategories of these independent variables are most influential on the biases is revealed. As a result of the analysis, in addition to determining the variables that affect a single bias, it is understood that the variable of education level affects all examined biases, and especially the effect of low education levels on the examined biases is higher. In the regression analysis, experience is identified as a significant variable affecting representativeness and conservatism biases. It is observed that especially the institutional investors who are inexperienced or less experienced interact with these two biases more in their decisions related to their individual investments. Gender is found to be significant variable on both conservatism and representativeness biases, especially it was understood that female institutional investors were more effective than men on the representativeness and conservatism bias. Furthermore, it is determined that the marital status variable and the divorced institutional investors as a subcategory of this variable are significantly influential on conservatism and overconfidence biases.

Relations between Cognitive Biases and Some Concepts of Information Behavior

Information behavior, as a part of human behavior, has many aspects, including a cognitive aspect. Cognitive biases, one of the important issues in psychology and cognitive science, can play a critical role in people’s behaviors and their information behavior. This article discusses the potential relationships between some concepts of human information behavior and cognitive biases. The qualitative research included semistructured face-to-face interviews with 25 postgraduate students who were at the writing-up stage of their research. The participants were selected using a purposeful sampling process. Interviews were analyzed using the coding technique of classic grounded theory. The research framework was the Eisenberg and Berkowitz information behavior model. The relationships that are discussed in this article include those between the principle of least effort on the one hand and availability bias and ambiguity aversion on the other; value-sensitive design and reactance; willingness to return and availability bias; library anxiety and ambiguity aversion, status quo bias, and stereotypical bias; information avoidance and selective perception, confirmation bias, stereotypical bias, and conservatism bias; information overload and information bias; and finally, filtering and attentional bias.

Stock Prices Analysis of State-Owned Enterprise and Non-State-Owned Enterprise in Response to Negative Information Period 2017-2019

There were bad news affected stock prices, i.e. Fraud and bad financial performance. Fraud on State Owned Enterprises (SOE) listed companies was suspected to have a stronger impact on stock prices compared to Non-SOE issuers. The effect of bad financial performance on Non-SOE issuers was thought to have a stronger impact on stock prices when compared to SOE issuers. This research was conducted on SOE and non-SOE that experienced fraud and bad financial performance from 2017 to 2019. Data analysis was performed with the Google Search Volume Index, Difference Test, and Multiple Linear Regression Analysis. The data from Google Search Volume Index showed that SOE issuers were more searched by the public when compared to Non-SOE issuers in responding to Fraud and bad financial performance. Linear Regression Analysis found that the decline in stock prices of SOE issuers was lower than the Non-SOE issuers in response to Fraud. The decline in stock prices of SOE issuers in response to the bad financial performance in the Property and Finance sectors was lower than the decline in stock prices of Non-SOE issuers. However, the decline in the stock prices of Non-SOE companies in response to the bad financial performance in the Basic Industry sector was lower than the SOE issuers. This could be influenced by SOE stock ownership dominated by the Indonesian government and the existence of a Conservatism Bias.

The Consequences of Allowing Home Country Auditors to Audit Cross-listed Firms: Evidence from Hong Kong-listed H Share Firms

We examine the consequences of a 2010 Hong Kong regulation that allows Hong Kong-listed H share firms to hire mainland Chinese audit firms to audit their financial reports. The H share firms whose audits require greater local knowledge and whose management and controlling shareholders benefit less from perceived auditor independence are more likely to switch to mainland Chinese auditors after the regulation. Following the regulation, the H share firms experience a reduction in audit fees and frequency of modified audit opinions but there is no evidence of a reduction in financial reporting quality. Further analyses show that the H share firms’ reduced frequency of modified audit opinions is likely a correction of Hong Kong auditors’ conservatism bias rather than a reduction in audit quality. Our results highlight the importance of auditors’ local knowledge and audit market competition in affecting the audit fees and audit quality of cross-listed firms.

Informational Social Influence, Belief Perseverance, and Conservatism Bias in Web Interface Design Evaluations

The ability to accurately measure the quality of a web interface design is critical if organizations hope to make effective decisions about their websites. Since websites are often the most publically visible face of an organization, website-related decisions can have profound impacts on the organization’s prospects for success. Prior research involving web interface quality assessments has typically considered those judging an interface to be independent actors who are making decisions in a situation that is free of social influence. In real-world settings, however, website designs are frequently evaluated by groups, rather than isolated individuals. To that end, this article seeks to provide insights into the effects that group-related cognitive biases may have on web interface design assessments. Specifically, by using a controlled, randomized experiment involving more than 500 research subjects, it is shown that judges’ web interface ratings can be easily manipulated by social influence phenomena, and that people assessing web interfaces in a social context are highly susceptible to informational social influence, belief perseverance, and conservatism bias. Given that these phenomena can all serve as significant sources of measurement error, and given the importance of being able to accurately measure the quality of a website design, the findings of the study suggest that organizational web interface design evaluations should be deliberately performed by individual judges in an environment that is free from social influence.

Toxic Expectations: Analyst Forecasts and Firm Pollution

This research examines the association between analyst forecast bias and firm pollution from a behavioural perspective. Firm pollution may decrease future earnings through regulatory burdens or reduced demand from consumer backlash. I hypothesise that analysts overestimate pollution costs due to overweighting low-probability events, the availability bias, and the base rate fallacy. Using a sample of firms from the Toxic Release Inventory from 1987-2017, I find evidence of systematic pessimism in analyst forecasts of the upcoming annual earnings of polluting firms. I also test whether individual analysts display persistent forecast errors for polluters in accordance with the conservatism bias. Results indicate that pessimistic and optimistic analysts are persistently biased towards polluters, despite having been proven wrong in recent forecasts. Although results depict systematic analyst pessimism for polluters, I find no evidence of any abnormal polluter returns around their earnings announcement dates.

Are the Effects of Age Still Relevant in Predicting Malaysian Investors’ Risk-Taking Behavior in Stock Market?

The role of age in moderating investor’s self-confidence bias, herding, conservatism bias, familiarity bias, and regret in risk-taking behavior is explored using data collected from retail investors in Melaka, Selangor, and Wilayah Persekutuan (W.P.) Kuala Lumpur. As indicated in data analysis by Partial Least Squares Structural Equation Modelling (PLS-SEM), age plays an important moderating role in herding, regret, and self-confidence bias in investor’s risk-taking behavior. While younger investors who tend to herd are more risk averse and feel more regret in risk-taking than the older group, older investors seem to exhibit a higher level of self-confidence bias than younger investors. However, the risk- taking distribution between the age groups indicates no significant difference. Thus, the readiness in greater levels of risk acceptance depends on the individuals’ preference towards herding, regret, and self-confidence bias. Furthermore, this study also address contradictions in the existing literatures that fuels stereotyping and discrimination based on age. Therefore, age stereotype should be avoided when formulating microstructure strategies to raise the investor’s participation in the stock market.

Competitive earnings news and post-earnings announcement drift

Using a large sample covering the period 1996–2015, we find a positive relation between the return of the announced firm on the date of peer firms' announcements and industry-wide earnings news of peer firms. Our results imply that same-industry-peer earnings announcements play a role in the analyst forecast-based drift, and are consistent with the notion of intra-industry information transfers. Additional analyses show that economic conditions and the relative size of the rival firms can affect the nature and magnitude of the link between announced firm's return surrounding the date of the rival firm's announcements and the rival firms' industry-wide component of earnings surprises. We also document evidence that is more consistent with analyst forecast-based drift reflecting investors exhibiting limited attention behavior as opposed to investors' conservatism bias. Our results are robust across different estimations and clustering procedures.