Illusion of

control and
convervatism
Group 5
 Group members:
Dela Cruz, Shairinne Samantha Nicole M.
Buado, Krista Rina
Moyalde, Ma. Klhea
Ognita, John Ritz
What is Belief Perseverance?
Belief perseverance, also known as belief persistence,
is the inability of people to change their own belief
even upon receiving new information or facts that
contradict or refute that belief. In other words, belief
perseverance is the tendency of individuals to hold
on to their beliefs even when they should not. It is an
example of bias in behavioral finance.
 Belief Perseverance Biases in Behavioral
Finance
There are several major belief perseverance errors. Outlined in CFI’s 
Behavioral Finance Glossary, they are:

• Conservatism bias
• The illusion of control

 
Each belief perseverance error will be discussed in detail below.
 Belief Perseverance Error: Conservatism Bias
Conservatism bias is a belief perseverance bias in which people
fail to incorporate new information and end up maintaining
their old views or beliefs.

For example, an investor purchases a security of a

pharmaceutical company based on the fact that the company is
about to finish stage 3 drug testing and receive regulatory
approval. Weeks later, the company announces that the drug
failed stage 3 testing and that the approval would be delayed
by months, if not years. If the investor clings onto his or her
initial valuation of the company and fails to change their
evaluation according to the new information disclosed, he
would be guilty of conservatism bias.
Conservatism bias is a mental process in which people maintain their past
views or predictions at the cost of recognizing new information.

For example, have you ever done a ton of research and identified and booked
the perfect beach rental for a family vacation months in advance?
However, as the vacation approaches you learn that a category-five
hurricane is set to make landfall directly on top of your condo. You know
that you should cancel the trip given this new information, but part of
you wants to head down to Destin anyway, right? The urge is so strong,
that you might even load up the car and plan to still go “unless things
look REALLY bad.” The great decision that you made months ago by
booking an awesome condo in a pristine location is clouding your
judgement given the new information. This isn’t your fault; it’s human
nature, and it can be a real danger in the investment world.
The Root Cause of Conservatism Bias
Cling to Forecast: Conservatism bias can cause investors to cling to a view or a
forecast, behaving too inflexibly when presented with new information. For
example, assume an investor purchases a security based on the knowledge
that the company is planning a forthcoming announcement regarding a new
product. The company then announces that it has experienced problems
bringing the product to market. The investor may cling to the initial,
optimistic impression of some imminent, positive development by the
company and may fail to take action on the negative announcement.

Slow to React: When conservatism-biased investors do react to new

information, they often do so too slowly. For example, if an earnings
announcement depresses a stock that an investor holds, the conservative
investor may be too slow to sell. The preexisting view that, for example, the
company has good prospects, may linger too long and exert too much
influence, causing an investor exhibiting conservatism to unload the stock
only after losing more money than necessary.
The Root Cause of Conservatism Bias
Failure to Revaluate Complex Data: Conservatism can relate to an
underlying difficulty in processing new information. Because
people experience mental stress when presented with complex
data, an easy option is to simply stick to a prior belief. For
example, if an investor purchases a security on the belief that
the company is poised to grow and then the company
announces that a series of difficult-to-interpret accounting
changes may affect its growth, the investor might discount the
announcement rather than attempt to decipher it. More clear-
cut and, therefore, easier to maintain is the prior belief that the
company is poised to grow.
 How to Avoid Conservatism Bias?
Just like with all other biases, the key to avoiding conservatism bias is by
believing the assumption that we could be wrong and our decisions
could be incorrect. Biases tend to hide in our mental blind spots.
Hence, if we acknowledge them, the problem is half solved anyway.

Seek Professional Advice: Many investors believe that they have the

necessary financial acumen to make their own financial decisions.
However, they still rely on other professionals to help them with
decision making. They do so not because they don’t trust in their
ability to understand the information. However, they do so because
the same information can be interpreted in different ways, given the
frame of mind of the interpreter. Hence, it is better to engage a
professional who tends to have different views than you. This will help
look at facts in a different light, which will help avoid the conservatism
bias.
How to Avoid Conservatism Bias?
Act Resolutely: A lot of investors do understand that they are ignoring
meaningful information. However, they continue to do so because
they are unable to act in a decisive and resolute manner.
Whenever new information comes that contradicts their existing
beliefs, they tend to dilly-dally and waste time. It is important for
investors to be slow to make up their minds. However, once the
mind is made up, they should act fast and decisively. This is
because, in investment markets, timing is as important as the
decision itself, if not more.

The bottom line is that conservatism bias provides another formidable

mental challenge for an investor. An investor is required to
overcome this challenge so that their wealth keeps on growing,
and they don’t end up in the self-destructive mode.
 Belief Perseverance Error: Illusion of Control

The illusion of control bias is a belief perseverance bias in which individuals

think that they can control or influence outcomes when, in fact, they
cannot. Ellen Langer, a social psychologist and professor of psychology at
Harvard University, defines the illusion of control bias as the “expectancy of
a personal success probability inappropriately higher than the objective
probability would warrant.”
For example, a customer service representative who works
at his local bank and receives stock options may prefer to
only invest in shares of that bank. Since he works at this
bank, he may feel that he has some control over the share
price. In reality, the customer service representative has
virtually no control over the share price of the bank.
What Is the Illusion of Control?

The illusion of control is a tendency to overestimate how much

control you have over the outcome of uncontrollable events.
This type of thinking is thought to play a role in superstitions, 
gambling behavior, and paranormal beliefs.

Research has found that when the outcome that people desire
occurs, they tend to believe that they were the ones who were
controlling it. This occurs even when people have no actual
influence over what happens.

Wearing a lucky baseball cap to “help” your favorite team win is

one example of this phenomenon.
 Characteristics
The illusion of control can affect people in a wide variety of
contexts and situations. You are probably falling prey to this
illusion anytime you think your actions influence an event
outside your individual control. Some characteristics of this
illusion include:

Engaging in rituals: For example, wearing a specific lucky item

or participating in rituals such as prayer to ensure that
your favorite team wins a game.

Dwelling on regrets: Sometimes, people will ruminate over

past events because they mistakenly believe they could
have controlled or changed the outcome.
Characteristics

Risky behaviors: People who think they are in control of events may
be more likely to engage in risky behaviors. Because they think they
are controlling what happens through their own actions, they also
assume that they will prevent any negative outcomes. 

Magical thinking: Research has found that when people try to make
something happen through force of will (i.e., trying to direct the
events with their own thoughts—such as willing a traffic light to
change or a basketball player to make the next basket), they tend to
attribute the outcome to their own thoughts.
Causes
Self-esteem: One theory suggests that the illusion of control helps to maintain and
enhance self-esteem. People feel better about themselves when they believe that
something they wanted to happen is due to their own actions.

Control: Another theory is that people have a need for control, so viewing uncontrollable
events as being within their control helps support mental well-being. Research has found
that when people perceive things as uncontrollable, they may be more likely to
experience negative emotions and decreased motivation.

Self-serving bias: Because the illusion of control enhances self-esteem and improves
motivation, it is often framed as an example of a self-serving bias. It helps protect people
from perceiving the events of their lives as being outside of their control.
Causes
Attribution errors: Research also suggests that people are more likely to attribute
 positive outcomes to their own efforts, but blame negative outcomes on other forces.

Personal involvement: One important factor that contributes to the illusion of control is
the degree to which people are personally involved in the situation. The more likely a
person will be affected by what happens, the more likely they are to believe that a good
outcome was due to their actions.

Optimism bias: People tend to have a natural bias toward positivity known as the 
optimism bias. In general, people tend to overestimate the likelihood that good things
will happen to them and underestimate the likelihood that bad things will occur. This bias
toward positivity may contribute to the illusion that people have more influence than
they truly do.
This illusion may occur because people
mistake random chance for skill. However,
people may also believe events are in their
control because of past events previously
aligned with their desired outcomes.
Other Influences
Type of feedback: When people receive feedback emphasizing success, they are more likely to
feel they are in control. When feedback focuses on failure, however, people tend to feel less in
control of the situation.

Familiarity: When people are very familiar with a situation and outcome, it is more common to
experience an illusion of control.

Emotional involvement: This phenomenon is stronger when people have an emotional

investment in what happens.

Mood: The effect is lessened among people who have depression. Depressed people are more
likely to make negative judgments about their ability to influence what happens.

Performance: Doing well at the beginning of a task often leads people to think they have more
control than they actually do.
Interestingly, researchers have found that
people tend to underestimate their own power
in situations where they actually do have high
levels of control.
This suggests that people don't just
overestimate their level of control—people
simply tend to make imperfect estimates of
their level of control in general.
Impact of the Illusion of Control
Believing you have control over uncontrollable events can have a number of significant
implications. It often leads people to invest time and energy into ineffective, unhelpful,
or even counterproductive actions. You might waste time or money engaging in
behaviors that don't influence the outcome at all. Those resources may have been better
spent on things that do have the power to benefit your life.

While this illusion is usually viewed in a negative light, it can have positive effects. Some
of the potential upsides of the illusion of control:

It can help you feel better about yourself: Believing those good things happen because
of your own knowledge, skill, or effort can be beneficial for your self-concept.

It can help you feel more motivated: If you think that your own actions determine the
outcome, you’re more likely to work hard to achieve a goal.
Impact of the Illusion of Control

It prevents feelings of helplessness: Feeling like you don’t have control can
have powerful negative effects, including the development of 
learned helplessness. This occurs when people feel that nothing they do will
make any difference.

It may inspire healthier behaviors: When people feel that their actions will
impact their health, they are more likely to engage in health-focused
behaviors.
Research has found that people who have a
greater sense of control engage in healthier
behaviors, experience less distress, and have
greater overall psychological well-being.
Coping
Everyone is susceptible to this illusion, but there are also things that you can do to lessen its effects
and make more deliberate, accurate judgments and decisions. A few strategies that can help include:

Try using an outside perspective: Instead of only depending on your own thinking, consider
information from the external world that might play a role in the outcome. For example, are your own
actions likely to have an effect, or are there other influences that are going to also play a significant
role? Taking a moment to consider those other influences may put your own role in a more realistic
perspective.

Think scientifically: In a 2015 study published in the journal Frontiers in Psychology, researchers

suggested that scientific thinking was the best way to avoid falling for the illusion of control. People
can reduce erroneous beliefs about causality and control to make better judgments by thinking through
situations more scientifically.

Seek other people’s opinions: If you are concerned that you are assuming too much personal
responsibility to influence the outcome of something in your life, consider asking others for their
opinions. This can be a great way to gain some outside perspective and consider other causal factors
that you perhaps hadn’t thought about.
While illusory control often centers on positive outcomes, these beliefs sometimes focus
on avoiding negative outcomes. For example, not walking under a ladder is a superstition
rooted in the idea that a person can prevent bad luck by not engaging in a specific
behavior.

Research has found that considering alternative explanations may help reduce the
illusion of control when people are focused on positive outcomes. However, one study
found that the opposite is true when the situation involves avoiding a negative outcome.
When an action is followed by an undesirable outcome, reminding people of other
factors that might influence that outcome can actually increase the illusion of control.

In the case of superstitious behavior, for example, telling people that bad luck is more
likely caused by random chance and not by their own behavior tends to increase their
belief that they are personally responsible for any negative events that follow.
In most cases, however, thinking critically and
scientifically is the best way to avoid being
deceived by the illusion of control.
Thank
you!