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The Traders Conservation Bias

November 13, 2017

 Every investor or trader should be aware which of his bias’s, we are all human beings and have our unique cognitive and emotional biases, by identifying which bias’s affect us the most and being vigilant about addressing them we can mitigate much of the damage. You have to know your weaknesses!


In this post I will talk about conservatism bias, which is a cognitive belief perseverance bias.

 

Let’s assume you bought EURUSD because it had a recent dip and you expected it to continue in its current uptrend once the correction was over. Fundamentals and technical seem to support your analysis so you are happy with your trade. The next day you open up your computer, check the economic calendar and see weak economic data came out showing that the euro zone economy was not as strong as previously expected and you see the EURUSD chart beginning to show reversal pattern. Instead of taking the time to study this new information and updating your outlook to incorporate this new information objectively, you experience cognitive dissonance, mental discomfort that this information conflicts with your initial belief and trade direction.

 

The rational response would be to properly analyze this new information and give it its
proper weight, followed by taking the necessary action (close the trade or lower your
exposure). If you don’t put in the effort of assessing what it means and how it affects your
trade, or ignore it as its conflicts with your already open trade then you are affected by
conservatism bias.

 

Another example is you bought a stock of a company based on the forecast the
company’s earnings will continue to be strong as they have been recently. Then a new
trade journal survey comes out showing consumers are favoring the competitors’
products. Instead of investigating how this new information affects your original earnings
forecast. You just maintain it. As a result you become a trader who

 

  • Slow to update a view or forecast with changing circumstances

  • Maintain outdated prior beliefs than deal with stress of updating them.

 

However you are not a helpless victim here. How can you deal with this bias?

 

  • First step is to be aware that the bias exists

  • Properly analyze and weigh new information: A constantly changing market calls for constant analysis to be updated

 

Good Luck and Happy Trading!

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