What is the primary effect of the conservatism bias on decision-making?

The primary effect of the conservatism bias on decision-making is that it delays the incorporation of new information into existing beliefs. This cognitive bias occurs when individuals are slow to adjust their beliefs when presented with new data that contradicts those beliefs or when they hold on to previous information longer than warranted.

In investing and finance, this can manifest as a failure to recognize changing market conditions or new economic data that should influence investment strategies. For example, if an investor has a strong belief in a company's potential based on past performance, the conservatism bias may cause them to undervalue or ignore recent negative news about that company, leading to poor decision-making.

By not adapting quickly to new information, investors may miss opportunities or fail to mitigate risks effectively, thereby impacting their overall portfolio performance. This highlights the importance of being aware of cognitive biases in financial decision-making and encourages a more rigorous approach to assessing new information in conjunction with existing beliefs.