Conservatism (belief revision)
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In
According to the theory, "opinion change is very orderly, and usually proportional to the numbers of Bayes' theorem – but it is insufficient in amount".[1] In other words, people update their prior beliefs as new evidence becomes available, but they do so more slowly than they would if they used Bayes' theorem.
This bias was discussed by Ward Edwards in 1968,[1] who reported on experiments like the following one:
There are two bookbags, one containing 700 red and 300 blue chips, the other containing 300 red and 700 blue. Take one of the bags. Now, you sample, randomly, with replacement after each chip. In 12 samples, you get 8 reds and 4 blues. what is the probability that this is the predominantly red bag?
Most subjects chose an answer around .7. The correct answer according to Bayes' theorem is closer to .97 ( based on Bayes' theorem:). Edwards suggested that people updated beliefs conservatively, in accordance with Bayes' theorem, but more slowly. They updated from .5 incorrectly according to an observed bias in several experiments.[1]
In finance
In finance, evidence has been found that investors under-react to corporate events, consistent with conservatism. This includes announcements of earnings, changes in dividends, and stock splits.[2]
Possible explanations
The traditional explanation for this effect is that it is an extension of the
See also
References
- ^ ISBN 978-0521284141Original work published 1968.
- PMID 22122235.
- .