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Behavioral finance glossary / FAQ / encyclopedia: alphabetical table; peter greenfinch
Behavioral finance FAQ / Glossary /

Encyclopedia
(Full alphabetical table of articles)
For access to an article
click the letter link in the related box.
A
* Accumulation /
Distribution
* Active / passive
investing
* Adaptation /
Adaptable / Adaptive
(system, economics, market)
* Addiction
* (under / slow)
Adjustment
* Administration /
administrative behavior
* Affect, affect heuristic
* (principal-) Agent /
Agency theory
* Agent-based model
* Algorithmic trading
* Alpha coefficient
(excess / insufficient return)
* Alternation (of trends)

* Altruism
* Ambiguity aversion,
ambiguity premium
* (mental) Anchor /
Anchoring
* (market) Anomaly
* Anticipation
* APT
* (logical) Fallacy
* Fallen angel
* Familiarity
* Fashion
* Fat tails / wings (in
distribution curves)
* (Greed &) Fear

* Feedback loop /
positive feedback
* Feeling
* Female investing
* Fluctuation
* Focalism, focusing effect
* Foot in the door
* Fractals / Multifractals
* Frame (dependence,
effect) / Framing (bias)
* Fund manager /
* (psychological) Pressure
* (bid, psychological) Price
* (fair) Price
* Price anomaly
* Price information
* Price-earnings ratio,
price to book ratio
* (Asset) Pricing
* Pride
* Primacy / priming effect
* Principal- agent theory
* Probability /
Probabilities (objective,
subjective, conditional)
* Procrastination
* Profile / Profiling 1
(stock types)
* Profile / Profiling 2
(investor types)
* Projection bias
* Propaganda
* Prospect theory
file:///C|/Documents%20and%20Settings/desib/My%20Doc...dia%20alphabetical%20table;%20peter%20greenfinch.htm (1 of 9)11/11/2008 15:08:10
* ARCH / GARCH
models
* Arbitrage opportunity
(absence of / limited)
* Arbitrage pricing
theory (APT)
* Archetype (stock, trader)
* Artificial Intelligence
(AI)
* Asymmetry / skew
* Attachment bias
* Attention anomaly,
bias, disorder
* (common) Attitude
* Attractor
* Attribution bias / error
* Automaticity, autopilot
bias
* Availability bias,
availability heuristics
* (disappointment, loss,
risk, regret, uncertainty... )
Averse, Aversion
* Aversion, disposition
and prospects
B
* BA
* Bandwagon effect
* BAPM
* Base rate fallacy /
neglect
* Bayes, Bayesian
probabilities, learning
* Bear / bearish /
bearishness
* Beauty contest
* (human) Behavior
* Behavioral analysis
management behavior /
performance
* Fundamental analysis
(FA), valuation, value
* Fundamental financial
data
* Fundamental
investors / traders
* Funnel effect
* Fuzzy logic
G-H
* Gamble / Gambler /
Gambling
* Gambler's fallacy /
paradox
* Game playing
* Game theory
* GARCH / ARCH
models
* Gender attitudes to
money management
* Generalization
* Genetic algorithm,
computing
* Genetic utility
* Get even bias, Geteventis
* Glamour stocks
* Goodhart law
* Greater (or bigger) fool
delusion
* Greed (& Fear)
* Group behavior
* Groupthink
* Growth investing / stock
* Gullibility
* Gunning
* Guru
* H coefficient, exponent
* Prototype
* Proximity bias
* Pseudo-certainty,
pseudo-instinct
* Psychology (of
investing, markets,
money...)
* (economic, financial)
Psychology
* Psychosociology /
Psycho-sociology
* Public behavioral
finance / economics
* Public choice / public
policy bias
* Pump and dump
* Pyramidal scheme
* QA
* Quality premium
* Quant
* Quant fund
* Quantitative analysis /
QA
* Quantitative behavioral
finance
* Quantitative investment
* Quantum lump, jump
R
* Random, randomness
* Random walk
hypothesis / RWH
* Range estimate aversion
* (risk of) Rare events
* (Ir-) Rational, (Ir-)
Rationality
* Rational bubble,
expectations, bias
* Rational choice theory
(BA - BFA
* Behavioral asset
pricing model (BAPM)
* Behavioral biases in
finance / economics /
management
* Behavioral corporate
management
* Behavioral economics
* Behavioral finance (BF)
* Behavioral parameters
* Behavioral portfolio
theory (BPT)
* Behavioral pricing
* Behavioral public
economics / finance
* Behavioral stock
pricing model (BSPM),
Behavioral valuation
* Behavioralist
* (common) Belief
* Benchmark game
* Bet, betting odds
* Beta coefficient
* BF
* Bias / Biases
* Bias for action
* (critical) Bifurcation
* Binary logic
Boom, Boom & Bust
* Bounded rationality
* Boredom (as a
motivation to act)
* Brain (circuits, wiring,
areas...)
* (speculative) Bubble /
Crash
* Bull / bullish /
bullishness
* Habit
* Halo effect
* Heavy tail
* Hemline theory
* Herd instinct, behavior,
Herding
* Heteroskedasticity
* Heuristic (bias /
shortcut / limited)
* (availability,
representativeness)
Heuristic
* Hindsight bias
* Home bias
* Hope (& fear)
* (investment) Horizon
* Hot hand
* House money effect
* Hubris
* Hurst coefficient,
exponent
* Hype
* Hyperactivity
* Hysteresis
* (mass, crowd, collective)
Hysteria
I-L
* (rational) Ignorance
* Illiquidity
* Illusion
* Image
* Imitation
* Inaction
* (perverse) Incentive
* Indecision
* Independence, (non)
Independent (in decision
* (bounded, near)
Rationality
* Rationalization,
rationalize
* Reaction / reactions to
info, news, events, signals
* Real estate market
anomalies/ herding/ boom
* Rebiasing
* Recency bias, effect
* Reductionism
* Reference point,
(mental) reference
* Reflexive, reflexivity,
circularity
* Regime switching
* Regret aversion /
avoidance / minimization.
Expected Regret
* (overconfidence in)
Regulation
* Reputation (of
professionals)
* Reputation (of stocks)

* (mental/cognitive)
Representation,
* Representativeness
heuristic
* Resonance
* Reversion / reverting /
revert (to the mean / to the
other extreme)
* (financial) Risk
* (small) Risk
* (Specific / systematic)
Risk
* Risk perception
* Risk premium
* Risk premia puzzle
* Risk-taking attitude,
aversion, perception,
* Buy and hold

* Buzz
C
* Calendar effect
* Capitulation
* CAPM / Capital Assets
Pricing Model
* (Information) Cascade,
cascading
* Certainty effect
* Chart, Chartism,
Chartist
* Chaos theory / chaosdeterminist walk<
* Cheating
* Choice
* Closed-end fund
discount
* (price, volatility)
Cluster / Clustering
* Cluster illusion
* Cobweb effect
* Cognition
* Cognitive asymmetry
* Cognitive bias /
distortion / flaw
* Cognitive consonance /
dissonance
* Cognitive manipulation
* Cognitive psychology
* Cognitive trap
* Cognitive overload
* Collective bias /
cognition / psychology
* Collusion
* Commitment effect
* Common Belief /
distribution)
* Inefficiency, inefficient
* Inertia
* Information (incidence
preference, profile,
tolerance, seeking
* Rogue trader
* Rotation (of attention,
of, reaction to)
interest, image)
* Information anomaly
* Information asymmetry
* Information bias
* Information cascade
* Information
dissemination
* Information economics
* Information overload
* (mental) Information
processing
* Intrinsic value
* Investor psychology /
style
* Irrational, irrationality
* January effect
* (Markovian, quantum)
Jump
* Kiss of death
* Knowledge, Knowledge
acquisition
* Knowledge asymmetry
* (illusion of) Knowledge
* Kurtosis
* Lag, latency
* Laziness
* Lead-lag
* Learning (social)
* Leptokurtic
distribution, leptokurtosis
* (financial) Lifecycle
* Liquidity
* (Flight to) Liquidity
* Liquidity crisis
* Liquidity premium
* Round number
anchoring
* Rumor dissemination
* RWH
S
* Salience, saliency,
salient
Satisfaction
* (financial) Scam
* (method of) Scenarios
* Schema, Schemata
* Script
* Seasonal anomaly,
Seasonality
* (economic) Sector /
concept fad
* Selection bias /
Selectivity bias
* Selective attention/
exposure/ memory/
perception / reporting
* Selectivity bias
* Self adaptation, self
organization
* Self attribution
* Self control bias, self
discipline bias
* Self esteem
* Self-defeating prophecy
* Self-delusion
* Self-fulfilling prophecy
* Self-illusion
Convention /
Knowledge / Paradigm
* Common Good
* Compartmentalization
* Competence effect (aka
illusion of competence)
* Competition cooperation
* Complacency
* Complex system,
Complexity theory
* Compulsion / ive
* Computer-driven
trading
* Confidence
* (pressure to) Conform,
Conformity
* Confirmatory /
confirmation bias
* (mental) Confusion
* Congestion
* Consensus
* Conservatism bias
* Consolidation
* Conspiracy theory
* Consumer (behavior,
choice, preference)
* (thought) Contagion
* Contrarian /
contrarianism
* (illusion of) Control
* Conventional wisdom
* Corporate behavioral
finance, corporate
governance
* Cost averaging
* (speculative) Crash /
Bubble
* Craze
* Critical point /
* Liquidity squeeze
* Liquidity trap
* Logical fallacy
* Long bias, longshot bias
* Long tails
* Loss averse, aversion
* Luck, luck puzzle
* Lyapunov exponent
M
* Magical thinking,
numbers
* Mania (collective)
* Manipulation,
manipulate
* Mass behavior,
hysteria, market
* Maximization (of utility,
of reward / risk)
* Mean-reversion /
reverting
* Mean-variance
* Media distortion
* Meme, memetic
* Memory (short, long)
* Mental accounts /
accounting /
compartments
* Microeconomics
paradoxes (St Petersburg,
Allais...)
* Mimicry
* (price) Misalignment
* Misperception
* Mispricing
* Misreaction (to info)
* Misrepresentation
* Mob psychology
* Self-serving bias
* Selling aversion
* Semi-volatility
* (investor / market)
Sentiment
* Sexual urge
* Shooting star
* Short term bias
* Signal, signaling
* Size anomaly / effect
* Skew, skewness /
Asymmetry
* Small numbers (law of)
* Social, social anomaly /
behavior / bias /
cognition / effect (general
definition)
* Social behavior / effect /
influence (on finance /
economics)
* Social learning curve
* Social psychology
* Social representation
* Social responsibility
* Social utility
* Socioeconomics,
economic sociology
* Sociopsychology
* Soft computing
* Systematic risk
* (financial) Speculation
* Spin
* Spin glass model
* Spotlight stocks
* Standard finance
* Stereotype
* Status quo bias
* Sticky (price) stickiness
* Stochastics, stochastic
threshold / mass /
coupling / temperature /
cluster, etc.
* Crowd behavior
* Cult companies
* Cultural bias, culture,
market culture
* Curse of knowledge
* Cycle / cycle-trend
D
* Debiasing
* Debt averse / aversion
* Deception (in financial
markets)
* Decision, decisionmaking
* Deification /
demonization
* Delaying tactics
* Denial (of realities)
* Diffusion (of
information)
* Disappointment
aversion
* (investment) Discipline
* Disequilibrium
* Disinformation
* Disposition effect
* (trend) Disruption
* Dissemination (of
information)
* (price, return, market)

Distortion
* (statistical) Distribution
curve anomalies
* Distribution /
Accumulation phase
* Divestiture aversion
* (trading, pricing,
investment...) Model,
Modeling
* Mojo
* Momentum
* Momentum investing /
trading
* Money attitude
* Money illusion /
monetary illusion
* (investor / market) Mood
* (general / social) Mood
* Moral
* Moral hazard
* Moral hypocrisy
* Motivation, motive
* (investor) Motivation
* Mysticism, mystical,
mystique
* (mental) Myopia
N-O
* Narcissism, narcissist
* Narration, narrative
* Narrow thinking
* (human) Needs
* Neighborhood effect
* Neural / neuronal nets
* Neuro-linguistic, Neurosemantics
* Neuroeconomics,
Neurofinance
* Neuropsychology
* Neuroscience
* Neutral market,
Neutral trend
* (effect of / reaction to)
News
calculation
* Stock image
* Stock profile /
profiling / type
* (good) Story,
Storytelling
* (investment) Strategy
* Stubbornness
* Stupidity
* Style of investing,
trading
* Sunk-cost fallacy
* Superstition
* Surprise
* Survivor bias, survival
* Swarming
* (dynamical / complex)
System
* System trading
* Systematic bias
* Systematic risk
* Systemic crisis / risk
T-U
* (statistical) Tail risk
* TA / Technical analysis
* Testosterone
* Throwing the sponge
* Tilt, Tilting
* Time arbitrage, value
* (Investment) Time
horizon, preference, span
* Tipping / Transition /
Triggering point
* Trading pattern, style
* Transitive preferences /
reasoning, transitivity
* Transmission of
* Dividend puzzle
* Dominant mental
interest
* Domino effect
* Doubt
* Dot-com / dotcom
bubble / craze
* Dynamical systems
E
* Economic man
* (market) Effect
* Efficiency, (in)
efficiency (economic,
technical)
* Efficient market
hypothesis
* Efficient (market, price)
* (primacy of the) Ego
* (return, price) Elasticity
* EMH
* Emergence
* Emotion, emotional
* Emotional bias
* Emotional intelligence /
literacy / reasoning
* Empathy
* Endowment effect
* Entrepreneur
psychology and behavior
* Endowment effect
* Epidemic
* (dynamical)
Equilibrium
* Equity premium,
equity risk premium
puzzle
* Ethical, ethics (in
business and financial
* Noise trader / Noise

trading
* Non-Independence
* Non-linearity,
nonlinear effect / system
* Non-stationary
* Norms (social)
* Nostalgia stocks
* Numeracy bias
* Numerology
* Obedience to "experts"
* Observer bias
* Ophelimity
* Optimism / optimistic
bias, overoptimism
* Ostrich effect
* Overconfidence,
overconfident
* Overleverage
* Overpricing /
underpricing
* Overreaction /
underreaction
* Overtrade, overtrading
* Oversimplification
information
* Transparency premium
* Trend (as fashion or
momentum)
* Trend following /
persistence
* Triggering / Tipping
point
* Trust
* Tunnel vision
* Type / Prototype
* Uncertainty (vs. risk)
* Uncertainty aversion /
avoidance / premium
* Underadjustment
* Underconfidence,
underconfident
* Underpricing /
overpricing
* Undertrading
* Underreaction /
overreaction
* Unfair
* Unintended
consequence
* Utility (in economics and
finance)
P-Q
* Pain (and pleasure)
* Panic
* Paradigm
* (decision) Paradoxes
* Paralysis
* Passive investing /
management
* PBR (P/B) effect
* Peer influence /
pressure / conformity
* P/E (PER) effect
* (expected) Utility
* Utility maximization
V-Z
* (asset, stock) Valuation
* Value
* (fair) price / value,
valuation
* (economic / expected /
intrinsic) stock Value
* (extrinsic) Value
* Value investing
* Value puzzle
decisions / information)
* (getting) Even, get

eventis
* Evolutionary
economics / finance
* Executive behavior
* (mathematical)
Expectancy / Expectation
(of value)
* Expectancy bias / effect

* (rational-mimetic)
Expectations
* Expected return
* Expected utility
* Expected value
* (illusion of) Experience
* Experimental (micro)
economics / finance
* (market) Externalities
* (law of) Extremes,
extreme risk
* Extrinsic value
* Perceived risk, risk

perception
* Perception
* Percolate, Percolating,
percolation threshold
* Persistence (in fractals /
trends / biases / volatility)
* (money, investment)
Personality
* Perverse effect,
incentive
* Peso problem anomaly
* Phase transition
* (market) Play, Player,
Playing
* Pleasure (and pain)
* (market) Positioning
* Power law
* Precision bias
* (economic) Preferences
interactions, reversal,
intransitivity
* Value stock
* Value trap
* Vicious / virtuous circle
* Viral communication
* (excess) Volatility
* (downside or semi-)
Volatility
* Volatility cluster
* Volatility smile
* Volatility puzzle
* Weak, neglected,
overlooked signal
* Wealth effect
* Wealth frame
* Weather bias / effect
* Willpower
* Winner's curse
* Wishful thinking
* Yin-yang asset
valuation
(followed in next column)
* FA
* Fad
* Fair (deal) / unfair
* Fair price / value /
valuation
* Fairness
(followed in next column)
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Behavioral finance glossary, letter A, peter greenfinch
Behavioral finance FAQ / Glossary (A)

A B C D E F G-H I-L M N-O P-Q R S T-U V-Z
Ac
Full list
Dates of related message(s) in the Behavioral-Finance group (*):

Year/month, d: developed/ discussed, i: incidental
Accumulation / Distribution
00/8i,12i + see distribution / accumulation, congestion / (price) cluster, percolation + bfdef3
Active / passive investing
07/8d + See momentum trading, overtrading, speculation, buy and hold, style
Buzzybee vs. Hibernatus

Definitions:
Active investing - or active (portfolio) management - is a money management method based on short term operations with frequent arbitrages and/or momentum
trading.
Passive investing - or passive management - is a long term money management, also called "buy and hold" (see that phrase), with as few as possible buy and sell
operations.
Although the difference is just one of time horizons and of methods, those practices are sometimes labeled - depreciatively in ideological circles - as speculation (see that
word) for the first one and hoarding (or "making money while you sleep") for the second one.
Active / passive investing is a key aspect of investor style (see style)
Consequences of those strategies
Active: adaptation or overtrading?
Passive: Zen management or status quo bias?
Active investing has the advantage of adapting the asset portfolio to market situations.
But it can become highly risky and costly if it leads to overtrading / noise trading (see those words) and concentration of assets instead
of diversification.
Passive investing minimize transaction costs and impulsive decisions.
But when it goes to extreme (see status quo bias) it has its risks also. For example it is usually financially dangerous to keep an asset
which we overestimate just because we own it (see "endowment bias"), or because its price fell (see loss aversion).
One form of passive investing is "index investing", but with the disadvantage of being subject to stock cycles if there is no
diversification in other assets.
Ad
Adaptation / Adaptable / Adaptive (system,
economics, market)

02/10i - 04/9i - 05/2i - 06/4i + see dynamical systems, evolutionary economics, chaos theory, percolation
file:///C|/Documents%20and%20Settings/desib/My%20Documents/Vocabulary%20May%202...20Terms/Behavioral%20finance%20glossary,%20letter%20A,%20peter%20greenfinch.htm (1 of 8)11/11/2008 15:08:57
Addiction
00/10i,12d + see overtrading, commitment, willpower, habit
How to resist it?

Addiction is a recurrent compulsion (in its extreme forms categorized as a pathology) which overcome rational thinking and brings damages to the person affected and
sometimes to others
Stock trading can become addictive and thus be a psychological disorder like any other.
This could result in "noise trading" / "overtrading" (see those words) which entails:
For the trader, high risks and costs.
In the market, return and price anomalies. At least if the contagion spreads (see herding) to many investors and is exacerbated by greed or fear.
(under- / slow) Adjustment
Administration / administrative behavior
Af - Am
Affect, affect heuristic
Due to its length, this article is in a separate page of this "A" section of the Glossary
04/9i + see corporate behavioral finance, public choice, principal-agent
03/6i + see emotions, sentiment, mood, attitude, heuristic
I feel like it!

Affect is the conscious part of an emotion (see that word). Emotion in its turn is a factor of most decisions.
An affect heuristic is a quasi automatic response or decision linked to the decider's mood (see that word). He might label it as his "instinct", whatever real nature of the stimulus that influences
him. This emotional behavior might to be illusory and go against rationality.
Examples in investing
According to a well studied example, people, and among them investors, might feel more optimistic when the sun shines!
They react or decide accordingly, for example they feel an impulse to consume or invest.
A good feeling towards a stock (positive affect) might lead to a lower risk perception and a higher benefit perception,
This goes against common market experience by which high return prospects entail usually a higher risk (see risk premium).
(principal-) Agent / Agency theory
08/i,8i,11i - 03/1i + see ethical, moral hazard, perverse incentive
Agent-based model
01/5i - 03/2i,8i,9i,12i - 04/2i + see style
Let us pack all those people inside the computer and see what comes out!
In economics / finance, an agent-based model (or agent model) is a software that simulates the actions (buying / selling) of several types of agents (professionals / general public, etc),
It takes into account that each category has its specific investor style / profile / preference (short term, long term, fundamentalist, "technicalist", follower, contrarian, etc...).
The aim of the simulation is to see how their interactions impact market prices, trends, returns, volatilities... It would help to understand those phenomena, and if possible to predict them.
Those models are one of the tools of microeconomics. This rising branch of economics tries to start from field realities more than from large equilibriums between aggregate national or
international data.
Algorithmic trading
See system trading
Alpha coefficient (excess / insufficient return)
00/6d - 01/9i - 02/7i,8i + see (sector) rotation
Does the lottery wheel choose its winners and losers?

Definition: the alpha coefficient measures anomalous asset returns.
Those can be defined as returns that are - rather durably (not just accidentally) - above or below what the standard theories, namely the CAPM and the RWH (see those
acronyms) predict.
Let us remind that those theories consider that:
Only differences in risk / volatility, or different "betas", explain differences of returns between assets.
The alpha coefficient appears in the CAPM equation, but is theoretically equal or close to zero in that model.
Positive or negative" alphas", meaning excess or insufficient returns that would be independent of the risk, would be impossible,
Predictable alphas that would bring superior performances than the market would not exist either,
The random walk hypothesis says you cannot beat the market by predicting the next price moves and returns.
But in practice,
History shows sizeable positive or negative alphas, in certain time frames, or in some sectors or stocks.
The past performances of fund managers in a given period are measured in alphas.
Here, alphas are extra or insufficient returns for their portfolios, compared to the general market performance.
Alternation (of trends)
00/6i,7d,8i + 01/11i + see cycle, trend + bfdef3
Altruism
08/6d + see ethics, needs, fairness, genetic utility
Moral incentives vs. money incentives

Altruism should not be neglected as a motivation, including in economics
People might do things because of altruism and of what they consider fairness and the common good that they would not do for money.
This does not mean that all moral motivations and "good intents" bring always positive results. Some can be overly emotional and self defeating, and sometimes manipulated.
Ambiguity aversion, ambiguity premium
An-Ap
01/2i + see uncertainty

(mental) Anchor / Anchoring
(market) Anomaly
Anticipation
See Bayesian, expectation, fundamental, probability, speculation, betting
Finance and the future are cousins.

An important job that markets, and notably financial markets, are supposed to do for the economy is to:
Determine adequate prices by anticipating, thanks to the "bets" made by their their players, the evolution of economic fundamentals.
Also adapt those anticipations / expectations by taking into account new events that change probabilities (the Bayesian approach).
After all, most financial operations, investing and borrowing to start with, are bets on the future.
Can it work?
Can we see farther than the tip of our noise?
It seems that markets anticipate broad evolutions, maybe better than the expert's consensus, but not perfectly.
This anticipation process has some shortcomings:
It entails some subjectivity from individual investors (and from professional managers also) about the probabilities of future events
This creates wrong or untimely appreciations of returns and risks, which can damage their money management. See all the "biases" cited in this glossary.
It is influenced, even contaminated, by the market evolution itself (see expectation, reflexivity, cascade, mimicry...)
This can foster excesses and crises (see bubble, crash).
APT
See Arbitrage Pricing Theory
Ar - As
ARCH / GARCH models
(limited) Arbitrage
(absence of / limits of) Arbitrage opportunity

00/6i,10d + see heteroskedasticity + bfdef3
Due to their lengths, those article are in a separate page
of this "A" section of the Glossary
Arbitrage pricing theory (APT)

Archetype (stock, trader)
00/12i + see profiling, type, prototype, style
An archetype is a common traditional mental reference to represent ideally a given category of things or phenomena (of stocks, of investors, for example...).
While "prototype" is used to describe a new design or phenomenon, archetype refers to old examples, real or invented. Both are found in finance: old categorizations as well
as new paradigms.
Artificial Intelligence (AI)
Asymmetry / skew
Atta - Atti
00/7i + see soft computing, genetic algorithm, fuzzy, non linearity


Attachment bias
See endowment effect
Attention anomaly, bias, disorder
00/8i - 02/3i + see cognitive overload, tunnel vision, anchoring, heuristic, weak signal, overtrading, boredom, emotion +
bfdef2
How come I missed it?

An attention (or attentional) anomaly or bias is the fact that somebody does not take notice of something that is crucial to make a decision.
It is hard to walk and chew gum at the same time or, more seriously, it is easy to:
Overlook, neglect or misinterpret the available information, by lack of attention.
This might result from habit, anchoring, stereotypes, belief or just lack of effort or interest.
Focus only on the most apparent future outcomes, because of tunnel vision.
What is behind such biases?

What can distract or blind the mind?
Those failures to spot crucial elements can be due to cognitive biases (as seen above) but also to emotions (affect heuristic...) that divert the attention. Information overload
also plays a part.
Sometimes, manipulations (see that word) can be used to divert somebody's attention (red herrings...).
Attention anomalies can be:
Either occasional, which leads to a few investment mistakes due to neglecting information.
Or repetitive, verging on "attention disorders", as a pathology is called.
Some studies state that a form of this bias is spreading in today markets. Investors and fund managers seems to lose interest easily in the assets they hold (this is the opposite
of the "endowment bias" that is common in other people). They move to other assets, in fits of hyperactivity (see overtrading). This is a kind of reverse "divesture aversion".
(common) Attitude
00/8i - 02/7i + see risk attitude, aversion
The market as a financial food tasting party...
An attitude is a liking or a dislike/aversion for something, somebody, some idea, some behavior.
What drives attitudes

Attitudes can be fed by events, information, emotions (themselves reactions to events usually), reasoning, beliefs or whatever other internal or external stimulus.
Although attitudes are usually conscious cognitive phenomenon, they are often driven by feelings and emotions (see emotion). Research in neuroscience has found
relations between positive and negative attitude and some brain chemicals and areas associated with pleasure and suffering.
Individual attitudes and common attitudes

To have attitudes, tastes and preferences is an internal tendency of the human mind.
Every individual carries its own rather constant attitudes, and some momentary ones.
A social group might also have a common attitude (see social, groupthink).
There is an interplay between individual attitudes and social attitudes. Common attitudes limit the independence of individuals attitudes.
Effect of attitudes
Attitudes (as well as beliefs) tend to translate into decisions and behaviors.
Behaviors might correspond to attitudes, but not always, as there can be a "barrier" in between.
In their turn those decisions and behaviors influence all fields of individual and social life.
Money and investment attitudes and behaviors

Attitudes and the related behaviors obviously have an impact on economic / financial events (supply, demand, price...).
Attitudes and behaviors related to money matters, and particularly to investment, are a key field of research of behavioral finance (see that phrase).
Attr
Attractor

00/5d,11i,12d - 01/8i,11i
What if chaos were not totally chaotic?

Attractors are a chaos theory concept that can be applied - metaphorically or directly - to Behavioral Finance.
In financial markets we may call attractor, in the broad sense, any recurrent pattern of market or stock behaviors - either biased or unbiased - that can be quantified.
Those patterns might be real or imaginary depending on circumstances.
Some real market phenomena seem to escape pure randomness and fit some pattern, if not because of "laws of chaos", at least as a result of some behavioral biases
On the other hand, some precautions are needed so as not to "see" illusive patterns (see representativeness heuristic) in all market evolutions.
Examples of "attractors" in finance

Trends, momentums, alternation/cycles,
Specific distribution curves of prices / volatility / returns,
Stock types,
Price levels,
Paradigms of valuation...
Attribution bias / error
00/9i,12i - 01/3i,5i - 02/2i,8i + see rationalization, self attribution, deification / demonification, story + bfdef2
I am OK, you are not OK, or maybe more OK than OK.

Definition: the attribution bias is the tendency to explain immediately a - pleasant or unpleasant - event, without further analysis, by attributing its responsibility (or at
least its origin) to somebody, to some organization or to some category of people.
For example, it is putting the blame, or the credit, on:
An identified person(s), for example the central bank president,
Or oneself (self-attribution, self-serving bias, group-serving bias).
For example, a random streak of luck might be considered as due to one's own skill.
In its extreme form,
A biased attribution can take the shape of deification / demonization (see those words),
A self-serving attribution might lead to overconfidence or even narcissism (see those words).
The attribution bias can also be at play when people attribute a pattern to some series or collections of events (see representativeness heuristic).
Au - Az
Automaticity, autopilot bias

See attention bias, reaction, status quo bias, habit
Be careful about behaviors that bypass your mind!

Automaticity defines actions or reactions done unconsciously and unintentionally, usually as the result of an habit (see that word) or of some emotional impulse.
Some biases cannot be fully categorized as cognitive or emotional, as they belong to quasi-physical, or clearly institutional, automatisms.
Those "autopilot biases" might have various origins:
For individuals:
Inertias, status quo bias, habits,
Also knee-jerk reflexes, hyperactivity,
And even addictions,
For human societies: rules, conventions, rites, taboos
Availability bias, availability heuristics
See heuristic
The availability heuristics is a cognitive bias using an oversimplified decision process based on how easily:
Information is found or recalled,
Or the causes or consequences of a situation are imagined.
See the "heuristic" detailed article.
(disappointment, loss, risk, regret,
uncertainty... ) Averse, Aversion
Aversion, disposition and prospects
Due to their lengths, those article are in a separate page

of this "A" section of the Glossary
(*) To find those messages: reach that Behavioral-Finance group and, once you are there, 1) click "messages", 2) enter your query in "search archives".
Members of the Behavioral Finance Group, please vote on the glossary quality at Behavioral-Finance/polls
visits to this page (common counter with previous page Behavioral-Finance Gallery)
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Behavioral finance glossary, letter B, peter greenfinch
Behavioral finance FAQ / Glossary (B)

A B
C D E F G-H I-L M NO P-Q R S T-U V-Z
Ba
Full list
Dates of related message(s) in the BehavioralFinance group (*):

BA
See behavioral analysis
Bandwagon effect
Due to its length, this article is in a separate

page of this "B" section of the Glossary
BAPM
02/11i + see behavioral assets pricing model
Base rate fallacy /

neglect
07/2i + see representativeness heuristic, mental

account
When legends or impressions are taken as statistical truths and

decision criteria.
Definition: the base rate fallacy / neglect is a mistake (*) in which people
ignore or forget the past statistical frequency of events, or use irrelevant
information about it.
(*) This cognitive bias belongs to the "representativeness heuristic" (see
that phrase) category.
The consequences
Fancy probabilities bring amateurish decisions
This neglect distorts somebody's decision making capability
as it can lead to:
file:///C|/Documents%20and%20Settings/desib/My%20Do...%20glossary,%20letter%20B,%20peter%20greenfinch.htm (1 of 9)11/11/2008 15:08:59
Overestimate or underestimate widely the

probability of the next occurrence of an event.
For example overestimate low probabilities
and underestimate high ones.
5% might be seen as one third and 95% as
two thirds
This is rather common. as a kind of mental
anchoring on a purported "middle of the
road" frequency of any event, although
reality is often more skewed and asymmetric.
But at the same time exclude the idea that very
rare events (see "small numbers") might happen.
Of course, the opposite attitude (see "numeracy bias") a
blind veneration for past statistics and mathematical
theories, as tools to predict the future, is also a mental
limitation.
It might make forget the context, the surrounding situation
and the potential changes and evolutions that might
contradict the past.
But to be wary about past numbers should not lead to wild
and uneducated beliefs. Pure "flair" also has its dangers. It
should only induce to think about possible alternative
scenarios (see scenarios, range aversion...).
How this fallacy can strike investors

In asset markets, this cognitive bias which distorts the vision of potential
future outcomes can make investors overoptimistic or over-pessimistic.
Then they under- or over-estimate:
Either their own future performance,
Or a money manager future performance,
Or the general market future performance.
Other neglects such as for example to forget to take costs and inflation into
account to weigh the real performances (see mental accounts), can
compound the mistake.
Bayes, Bayesian
probabilities,
learning

Bea - Beh

Bear / bearish /
bearishness
00/10i - 01/10i - 02/1i,5i,7i,8i - 03/2i - 04/3i - 05/10i

+ see trends, bull, crash
Furry animals that ski down the slope.

Definition: a bear / bearish market is a market in which the price trend
(see that word) is downwards and the market sentiment is pessimistic (*)
about the future price evolution.
The commonly accepted criteria to identify it are that:
Prices have been falling for months or years

(**),
The total fall has crossed the minus 20%
mark in the most representative market indexes
compared to their highest previous point .
This is the most consensual definition of a
bear market.
That trend seems "settled in"
It still shows, except for some intermediate
"bear rallies" - soon corrected - no sign of
reversal (which of course is not an insurance
that the trend will persist for long).
(*) Although, paradoxically, it is often when the pessimist sentiment is the
more widespread that the recovery (or at least a temporary rally) is in sight.
(**) This differs from a crash (see that word) which is a sudden fall that
might signal in some cases that a bear market is starting but that in other
cases can revert rapidly.
Animal life
To go on with the market animalistic mythology, the opposite of a bear
market is a bull market.
Why those metaphors? There are various interpretations, although few
people ever saw skiing bears or flying bulls
Beauty contest
06/2i - 07/7i + see rational expectation, reflexivity,

herding, self fulfilling prophecy
Looking more at the jury than at the swimsuit bearers

The beauty contest is a parable on investor behavior which was formulated
by the economist Keynes.
It shows that a (temporary) winning strategy for an investor is often:
Not to predict the assets' price by using fundamental data (the real
beauty of the asset),
But to try to predict the price that the majority of the other
investors will predict.
This is a rather rational attitude in some way (see rational expectations). But
it has also strong similarities with herding and peer pressure.
Market effects
Beautiful or ugly market?
This phenomenon makes the market self-referent (see reflexivity).
Investors try to find clues in the market itself instead of looking at the
economic sphere.
Endogenous and subjective criteria are preferred to exogenous realities.
Thus the market gets prone to positive feedbacks (excessive behaviors)
and self fulfilling prophecies.
Of course, one day, fundamentals come back in force and the contest can
get ...ugly (market crash).
(human)
Behavior
Behavioral
(financial)
analysis (BA BFA)
Behavioral
asset pricing
model (BAPM)
See
page:
behav.
bias
behav.
finance
See
page:
- d -
Behavioral
biases in finance /
economics /
management
See
page:
Behavioral
corporate
management
See
page:
behav.
bias
corp.
behavior
Behavioral
economics
Behavioral
finance (BF)
Behavioral
parameters
Behavioral
portfolio theory
(BPT)
Behavioral
pricing
Behavioral
public
economics /
finance
Behavioral
stock pricing
model (BSPM),
Behavioral
valuation
Behavioralist
Bel - Bet
behav.
economics
See
page:
See
page:
behav.
finance
- d - d - d -
behav.
economics
See
page:
See
page:
behav.
finance
- d -

(common) Belief

Benchmark game
See attribution, Goodhart law
Staying on the main roads.

Benchmark portfolio management is a technique that is performed by:
Layering (as a kind of naive diversification, / asset allocation) a
portfolio in several types of stocks,
Comparing each of those sections to a specific market index (the
chosen benchmark).
Results
Ready-made excuses?
As a result of such a practice, absolute performance objectives are
replaced with relative ones.
It leads to a biased / non-optimal management. It gives an excuse in case of
losses, by attributing them
To the general performance of the market, or of the related market
section used as a benchmark,
Not to the managers who stuck investing in it.
A side effect is that a manager who gets behind its target can decide to take
extraordinary risks to try to reach them before the end of the period, a
behavior close to get-eventis (see that phrase).
Bet, betting odds
01/9i - 03/10i,11d,12i + see gamble, game theory
Are betters ...better at predicting?

Odds are the comparison between the probability that the betters give to an
event and its non probability (ex. 1/3)
Knowing the betting odds (of course if there is some organized betting)
might help to predict the outcomes of an economic situation (or of other
social situations).
Those odds might be more reliable than polls answers or past statistics.
The reason is that, although bettors have their own biases, people who
commit money are more wary than those who answer instinctively to a
survey. An they might have some vision of future evolutions that past
statistical data could not reveal.
Also bets usually don't influence / change the outcomes (well, except if
things are rigged ;-).
Beta coefficient

Bf - Bi

BF
See behavioral Finance
Bias / Biases

Bias for action
See boredom
(critical)
Bifurcation
Binary logic
Bo

See narrow thinking, fuzzy logic, yin yang

(economic,
financial) Boom,
Boom & Bust
04/1i - 05/10i - 08/2d + see bubble, cycle
Bounded
rationality

page of the "R" section of the Glossary
Boredom (as a
motivation to act)
00/5i,10i - 01/6i - 02/7i + see gambling, overtrading,

hyperactivity, noise trading
From inertia to crazy moves.

Boredom often gets hand in hand with an absence of motivation and action.
But in some cases, on the contrary, it might lead some people, so as to fight
boredom, to decide some impulsive, unnecessary and even excessive,
actions. Had those bored people thought about their economic interest /
utility or life preferences, they would have seen those actions as
unnecessary, or even damaging for them or for others.
Note: the same hyperactivity and "bias for action" (in a way the
opposite of the "status quo bias") could have other origins than
boredom, as it can result also:
Impatience, hedonic research and various fantasies, urges,
compulsions or addictions,
But also, as "people don't live only on bread", from higher goals,
ambitions and pursuits, some well grounded, some others illusory.
In investment matters, boredom can bring overtrading or noise trading

(see those phrases).
In another approach of the word, in economics or finance, the whole
market can get inactive, bored (and boring), with low volatility, for
example after a long crash. That may end in a day of "capitulation" (see
that word).
Br - Bz

Brain (circuits,
wiring, areas...)
02/21- 07/3i + see neural net, neuroscience,

neuroeconomics, neurofinance, agent (-based)
model, script, cognition, habit, information, decision.
Diverse human brain areas, related to cognition and emotions, interact in

information processing and decision making.
The neural / neuroscience articles aims at providing some basic
knowledge about how the interactions between those areas work, and what
processes people can use to decide and act.
This has applications in economic, business and financial decisions, under
the designation of neuroeconomics and neurofinance).
(speculative)
Bubble / Crash

Bull / bullish /
bullishness
00/10i - 00/1i,2i,5i,6i,8i - 03/2i - 04/3i - 05/1i + see

trends, (investors) sentiment, bubble, bear
Climbing bovines?
Definition: a "bull / bullish market" is a market in which:
Prices have been rising strongly for months or years without showing
signs of decisive reversal, except some intermediate "corrections".
The market sentiment is optimistic about the future price evolution.
To Keep It Short and Simple, that phenomenon has resemblance with a
bear market (see above), except for its main trait: it goes ...in the opposite
direction (no secrets between us ;-).
But why those animalistic metaphors?
Well, there are various interpretations, although few people ever saw
skiing bears or flying bulls.
Buy and hold
07 /10i + see passive management, value stock
Buying golden hens, and keeping them long enough at the

farm to get all their golden eggs.
Buy and hold is a very selective investment strategy in a few value stocks
(see that word) that not only can be bought at a reasonable price, but also
show outstanding qualities:
A market leadership in their industry,
A wise and reactive management,
A promising and stable business model that, although offering enough
growth, is rather immune to technical, economic and social evolutions.
The strategy is to buy those (very rare) gems when they are cheap, and to
keep them whatever the stock market fluctuations (the contrary of
hyperactivity, noise trading, momentum trading..., see those phrases).
Buzz
See meme, viral communication, rumor
(*) To find those messages: reach that Behavioral-Finance group

and, once you are there, 1) click "messages", 2) enter your query in
"search archives".
Members of the Behavioral Finance Group, please
vote on the glossary quality at Behavioral-Finance/
polls

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Behavioral finance glossary: letter C, peter greenfinch
Behavioral finance FAQ / Glossary (C)

A B C D E F G-H
I-L M N-O P-Q R S T-U
V-Z
Full list
Ca
Calendar effect
00/11d - 01/4i,10i - 05/12d + see seasonal effect, time horizon
Markets seem to remember birthdays.

Definition: "Calendar effects", "seasonal effects", "periodic effects" in asset markets are periodic and temporary return anomalies that some statisticians have detected. They occur in specific
times of the day, the week, the year.
Those abnormal stock price moves (rises or falls) seem to repeat themselves once a week, once a year, etc. and bring temporary return distortions, compared to the general trend or to
fundamental values.
Examples
Although there are controversies about the existence of such effects, those usually cited are:
Autumn effect, January effect, turn of the month effect.

Weekly effect, week-end effect, Monday effect (*), back to work effect, morning effect, etc.
(*) It seems that you can find better bargains on Mondays, when investors are a bit depressed, than on Fridays when they joyously anticipate the week-end),
Full moon vs. new moon,
Weather bias / effect sunny days vs. rainy days...
But why?
The calendar effect might be just a pop psychology interpretation in some cases, but real phenomena in other cases.
In such periods, stocks perform differently than in other periods which could signal that a special mood makes them accept to overpay or underpay stocks they buy, or to be overpaid or underpaid
for the stocks they sell.
Maybe, as calendars - slice by slice (days, weeks, months, years...) like a salami - show a discrete evolution of time instead of a continuous one (see the time article), each new step (new year,
new week...) gives investors the impression of a new start in life.
The weather bias / effect (see that phrase) seems more linked to physiological pleasure or pain.
Capitulation
02/6i - 07/4i - 08/7i + see crash
file:///C|/Documents%20and%20Settings/desib/My%20Documents/Vocabulary%20May%202...%20Terms/Behavioral%20finance%20glossary%20letter%20C,%20peter%20greenfinch.htm (1 of 8)11/11/2008 15:09:01
Farewell to arms and to stocks

Definition: in an asset market, a "capitulation" is a one day sudden big general price fall with a massive transaction volume, let us say around 10% across the board, that might happen at the
end of a rampant crash that lasted several years.
This occurs when everybody, including investors who were still hoping for a recovery in the end, cannot stand anymore the pain, throw the sponge and get rid of their assets. They conclude that
the market is definitively doomed and may go on falling endlessly. Risk aversion reach a peak.
That mass selling might precisely signal the end / bottom of the crash, by purging the market of all pending / potential sales.
Also as one of the criterion is not only a brutish fall but also a massive volume of transactions, it means might mean that some "big hands" are buying: see accumulation.
This interpretation makes contrarians (see that word) consider capitulation as a signal that the recovery is ready to start.
CAPM / Capital Assets Pricing Model
Due to its length, this article is in a separate page of this "C" section of the Glossary
(Information) Cascade, cascading
Ce - Cl
Certainty effect

04/10i - 08.6i + see expected utility, risk aversion, cognitive trap, overconfidence, (sure thing effect), belief
The certainty effect is linked to risk aversion and the expected utility theory.
People prefer a prospect that offers the certainty of a small gain to a prospect of a much larger gain that entails some risk.
This can be biased when people deem as certain a prospect that is not really so but is just a belief (see belief).
In such case they tend not to adapt their judgment to realities (pseudo certainty, sure thing effect, selective perception, base rate fallacy, belief...)
(market) Chart, Chartism, Chartist
03/11i,12i + see TA
Definition: Chartism tries to find signal-bearing geometrical patterns in market data graphs (price charts usually).
It is the most commonly used Technical Analysis (see that phrase for details) technique (the other one is to use quantitative methods).
Actually, there are various methods, as chartists use several types of charts (lines, candlesticks) and different ways to interpret them.
Chaos theory / chaos-determinist walk
00/6i,9i,10i,11i,12d - 01/8i -02/4i,8i - 03/2i + see bfdef3 + dynamical systems, bifurcation, percolation
Butterfly wings down Wall Street

The chaos theory describes some apparently erratic phases found in the evolution of dynamical systems (see that phrase). It theory tries to find some hidden order, some
determinism (chaos-determinist walk) in what appears as being a pure random walk.
Attractors, fractals, percolation, bifurcations (see those words), sensitivity to initial conditions (the famous "butterfly wings effect"), etc. are important themes in chaos theory.
Chaotic periods in economics and finance

Economics and finance are themselves dynamical systems and are subject to some of those chaotic phenomena.
Stock price fluctuations seems to reflect in some degree chaos theory models, with alternations of:
Chaotic phases (high volatility with non linear jumps and no clear trend),
And stable phases: stases (neutral market) or quasi linear trends.

Also, at a certain threshold a "phase transition" might occurs (see percolation), for example when a certain "trigger" price is reached in an asset market.
Cheating
See moral hazard, deception, ethics
Honest cheating?
There seems to be a widespread tendency in human behavior to consider cheating (and typically one's own cheating) as rather innocuous, or even "fair" to rebalance
disadvantages, and to miscalculate the risk of being caught and its negative consequences.
This might contribute to the understanding of behavioral phenomena such as moral hazard, deception, lack of ethics (see those words)...
Choice
See decision, behavioral economics
Closed-end fund discount

The market tends to price the stocks of some companies that own an asset portfolio well below the net market price of those assets. This is the case usually for:
Closed-end funds,
Holding companies that are heads of a conglomerate,
Also real estate companies.
There is still no experience to see if the same phenomenon will apply to private equity funds if they get widely traded in stock markets.
(price, volatility) Cluster / Clustering
Cluster illusion
Co - Cog
Cobweb effect
Due to their lengths, those articles are in a separate page of this "C" section of the Glossary

See cycle
Cognition
Cognitive asymmetry
Cognitive bias / distortion / flaw
Cognitive consonance / dissonance
Cognitive manipulation
Cognitive psychology
Cognitive trap
Cognitive overload
Col - Com
Due to their length, those articles are in a separate page

of this "C" section of the Glossary

Collective bias / cognition / psychology
04/1i + see social psychology / bias / cognition, effect, psychology + groups, herding, socioeconomics, behavioral
finance + bfdef
Collective is often used as a synonym for "social" (see that word)

Collusion
Commitment effect
Common Good
Common Belief / Convention / Knowledge /
Paradigm
03/11i + see manipulation, consensus

08/6i + see altruism, needs, ethics
00/8i,9i,11i - 01/2i
+ see belief, meme, memetics, P/E, paradigm + bfdef2
Definition: a common convention / paradigm is a concept / explanation / assumption shared by most members of a group or society and which affect their decisions. That
mutual knowledge can be tacit or expressed, proven or not, useful or not.
For example, the P/E or PER (price/earnings ratio, see that term) is widely used by investors as a common benchmark to compare stocks, although it does not give directly
an information if a stock is expensive or cheap.
Compartmentalization
Competence effect (aka illusion of
competence)
Competition - cooperation
See mental accounts

See overconfidence
See ethical, game theory, experimental economic, ethics
Behavioral finance, experimental economics and game theory consider cooperation and competition as the two alternative human adaptation strategies.
Those various fields of knowledge study in which situations people tend to cooperate and in which other they tend to compete.
They also try to find out if and when such behaviors:
are instinctive or deliberately chosen,
are performed for either ethical, or emotional, or self-interest motivations.
Complacency
See overconfidence
Complex system, Complexity theory
03/2i,12i + see chaos theory, dynamical systems, non linear
Complex systems are

* Specific forms of dynamical systems (see that phrase)
* In which many factors intervene (complexity)
* And that tend to evolve in a non linear way (disruptions): see nonlinear
The economy is one of the examples of a complex (dynamical) system.
Compulsion / Compulsive
00/11i
A compulsion is a pulsion, an inner incentive, that is so extreme that people don't resist it even when it goes against their interests and their life goals or ethics.
Computer driven trading
see model
Con

Confidence
See trust, sentiment, mood, overconfidence, underconfidence, optimism bias
(pressure to) Conform, Conformity
>01/1i - 02/10i - 04/8i - 05/1i + see norms, peer influence / pressure, groupthink, mimicry, contagion, consensus, herding
The laws of robotics?

One of the first scientific study on conformity was the "Ash experiment" by Solomon Ash in 1958.
Definition: Conformity is the alteration of personal attitudes, beliefs or behaviors, that lead to conform to the group rules and practices.
Such alterations can be attributed to group pressure (see peer pressure). Emotional and rational factors can both play a part:
To follow such pressure is mostly emotional (and often unconscious), and it is difficult to resist it.
But conformity is also partly rational, as an "adaptation" tool, that people use when to dissent might be dangerous for them.
For example, not to go with the trend in a stockmarket has its danger, as it is not easy to predict when the trend will revert. However exaggerated its deviation from
economic realities might look like, the market price mad race might still accelerate instead of receding. The gamble is to judge how far it can go too far before hitting the
ditch.
Confirmatory / confirmation bias
See cognitive dissonance, selective exposure / perception, belief
Definition: the confirmation bias is a tendency, linked to cognitive dissonance and belief persistence, by which people, and among them investors:
Look for and admit as relevant only information that confirm their prior beliefs,
And / or to interpret whatever information in a sense that fits those preconceptions
(mental) Confusion
In the strict sense, mental confusion is a lowering of mental abilities.
In a more specific sense, when making economic or financial decisions, people may confuse their preferences (wishful thinking or magic thinking) or their frights with real
probabilities.
Congestion
01/11i + see (price) cluster, accumulation, distribution, consolidation, volatility
Definition: a price congestion or consolidation in an asset market is a period of low volatility when prices don't move much. (see cluster),
It can be assimilated to either a pause in the trading traffic, a lack of investor interest, or on the contrary to a traffic jam when as many people want to enter a crowded market
than to leave it.
It is generally followed by a surge in volatility when prices resume their previous trend or start a different one.
Consensus
Conservatism bias
07/3i + see status quo bias, underreaction
Consolidation
See congestion
Conspiracy theory
05/10i
Consumer (behavior, choice, preference)
08/2i + see decision, behavioral economics, preference
(thought) Contagion
Contrarian / contrarianism
02/10i + see epidemic, conformity, domino effect, groupthink, mimicry, peer pressure, consensus, viral communication,
critical threshold + bfdef
(illusion of) Control
03/1i,2i - 04/3i + see definition at "overconfidence"
Conventional wisdom
See conformity, consensus, social influence, social learning, heuristic
Conventional wisdom can facilitate reasoning and decision-taking as a kind of "collective heuristic", but beware that convention do not overtake wisdom.
Cor-Cr
Corporate behavioral finance, corporate
governance
Cost averaging

03/12i - 05/2i + see corporate behavior article
See commitment, loss aversion, sunk cost fallacy
Buying more when losing.

Definition: cost averaging (called also in some countries "dollar cost averaging") is purchasing an additional quantity of an asset (stocks for example) when its price falls
down.
It is a symptom of loss aversion / get-eventis (see those phrases) under the pretence of reducing the average cost. It is true hat it gives a lower average buying price. But the
holder has a larger quantity of stocks, thus it increases the amount at risk, which goes against efficient diversification, and might be throwing more money into the same hole.
Commitment and loss aversion might explain this practice of lowering the average unit cost, but at the price of a bigger risk. As concerns commitment, the most an investor
pour efforts and money in an asset, the more he becomes committed / addicted to it, the less he will accept to change course (see endowment effect).
Practices that differ from crude cost averaging

Gathering nuts one by one, squirrel-like.
This purely reactive behavior is not to be confused with an initial strategy of buying gradually (and not only when the price falls), and stopping buying when the initially
projected quantity has been acquired.
Cost averaging can also be systematized in an investment plan, when every month for example a given sum is allocated to stock investing whatever the market situation. This
has the psychological advantage that people invest with a long term view but the disadvantage to neglect timing.
Last but not least, what is usually called cost averaging is in fact negative price averaging as it tries to lower the average price. But a positive cost averaging is also possible,
for example increasing an investment in an asset which price trend goes upwards for what seems good reasons.
(speculative) Crash / Bubble
Craze
Critical point / threshold / mass / coupling /
temperature / cluster, etc.
See fad, crowd, hysteria
01/1i - 04/1i - 06/8i + see bifurcation, percolation, contagion + bfdef
00/8d,9i,11i,12i - 01/3i - 02/3i,4i,5i,9i - 03/03i - 04/4i - 06/11i

+ see herding, groupthink, mimicry, hysteria + bfdef2 site link
Crowd behavior
Do crowds feed individual brains, or do they eat them?

The idea between the crowd behavior / mob psychology notion is that people behave differently in a crowd than they would do individually. Now what are the effects?
The so-called "wisdom of crowd" tends to operate in the long run (that is why markets, and more generally the human civilization, survive, with a balance of positive
outcomes).
But in the meantime it not always present, as there are fairly long periods when collective emotions, often irrational, tend to supersede it.
When crowd behavior becomes extreme behavior

Getting out of control.
In a crowd, whether a physical or disseminated (masses) one, individuals might lose their inner inhibitions (thanks to a sense of anonymity) and personal thinking (in
unison with the crowd), and follow the collective behavior.
Therefore, sometimes their actions go to extremes. In such cases of "collective hysteria", crowd emotions tend not only to reinforce individual irrationalities, but also to
replace individual rationality by regressive / animalistic / visceral collective reactions.
Then, individuals tend to adopt excessive and damaging behaviors (panic, aggression, or worse...).
The article on "herding", a related phenomenon, gives more details.
Investor crowds
Queuing at the market entrance or exit
In asset markets, there are times when the bulk of investors / traders tend to act as an irrational crowd, with collective greed or fear, as if nobody would want to "miss the
party". The results on prices and returns can be:
Either minor trends (return clusters) or price clusters, due to occasional fads fashions (or, conversely, apathies),
Or, when those herd emotions become exacerbated in dramatic over- / underpricing, the famous bubbles and crashes.
Cu-Cz

Cult companies
See image types
Cultural bias,
Cultural asymmetry
Culture, market culture,
02/7i- 05/2i + see profiling, styles, (cultural) asymmetry, neuro-semantics, knowledge
The advantage of the right culture in the right situation.

Obviously there are various types and degree of cultures among various people (see asymmetry), which impacts their behaviors.
Definition: a cultural bias is judging and interpreting phenomena taking only into account one's own culture.
In decision making a cultural bias might be a survival tactic among people with the same culture, or in matters in which they excel. But it can bring disaster in matters where
other cultures are at play.
Effect of market culture on economic and investing decisions

Market literacy
Definition: market culture is the understanding of how markets works and of their norms. Outsiders might lack this market literacy, which makes them at a disadvantage.
More generally, economic and financial cultures differ between countries (and epochs), and of course between levels of education and kinds of occupations.
Among other cultural differences some crucial ones might concern the risk attitude.
One of the criteria to segment investors types is their investment culture, on condition the "soft" (= behavioral) aspects of such culture could be identified in individuals
(neuro-semantics is a field of research that deals with such things, among others).
Curse of knowledge
See story
Cycle / cycle-trend
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Behavioral finance glossary, letter D, peter greenfinch
Behavioral finance FAQ / Glossary (D)

A
B C D
E F G-H
I-L M N-O P-Q
S T-U
V-Z
Full list
Da - De
Debiasing
01/08i,10i,12i - 03/5i + see rebiasing, tilting, image
Straightening the skews and tightening the screws.

Definition: debiasing is finding and eliminating mental biases in decision making.
That analysis and correction process can be considered as a "personal hygiene" for deciders.
Debiasing in finance
Loose money screws. Better fix them.
Investors, borrowers, traders might find in debiasing a way to improve their rationality and efficiency. The trick is:
To identify the two kinds of biases (general and personal) mentioned below.
You guessed it: the information in this site might help!
To find how to avoid or correct those biases,
Logically, to make it followed by some "rebiasing" in order to adapt one's decisions to other investors biases:
Identifying
Two level of biases
1) General level.
Spotting collective investors biases that
explain anomalies in market price levels,
returns or trends.
Doing our
Rebiasing
1) Taking advantage of market anomalies.
It might be profitable to mimic consciously
some investor biases (see "tilting" as one of
the methods).
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2) Personal level
Observing our own cognitive or emotional
biases that interfere in our own decision
making process.
2) At the same time, avoiding or correcting our

own biases,
or compensating for them.
Our valuation method based on the stock image coefficient (see "image") is an attempt at debiasing / rebiasing the way the
stock market prices stocks.
Debt averse / aversion
05/1i
Debt aversion is the reluctance to commit more that one's own financial resources in an investment, whatever the expected
rewards.
The opposite bias is a taste for overleverage (see that word).
Deception (in financial markets)
Due to its length, this article is in a separate page of this "D" section of the
Glossary
Decision, decision-making
Glossary
Deification / demonization
02/8i + see attribution
Venerate as an idol or punish as a culprit?

Deification and demonization are extreme forms of attribution biases.
They take place when a person (personalization), a group, an institution, or even a natural or man-made thing, is quasi
unanimously considered as the main responsible for:
Either a good situation (here we have deification, the person is considered god-like). "Join the fan club",
Or a bad one: demonization, the person is embodied as an evil agent. "Find a culprit", "Name a scapegoat".
For example:
The governor of a central bank is often held responsible for an economic boom or slump, whatever its real causes.
Also, some companies or stocks might be deified or demonized because of their past records, or for more frivolous
reasons.
When situations revert, deified persons (or stocks) might become demonized. More seldom, it can be the other way round,
going from demonization to deification.

Delaying tactics
Glossary
Denial (of realities)
02/7i,12i, -05/1i - 06/4d + see cognitive dissonance, rationalization, framing, belief +

bfdef2
Denial is the attitude of a person who does not admit real events and situations when they are contrary to:
His own beliefs (that have become its pet dogmas),
Or some conscious or subconscious aversion, according to psychoanalysts.
Sometimes it can lead to interpret events or to "frame" (see that word) them in a way that fits those preconceived ideas (see
rationalization).
Denial in investing
Biased investment decisions that ignore realities? That must be the case for other investors, not for me!
In stock markets, denial seems to be one of the causes of underreaction to new information.
Denial can even affect investor who are aware that investing biases exist. Even people knowledgeable in behavioral finance /
economics or in social psychology might deny that they are themselves subjected to some of those biases.
That self-centered illusion might explain why biases are recurrent in finance as well as in economics and other fields of
personal and social activities.
Dif - Dis
Diffusion / dissemination (of
information)
Disappointment aversion

Glossary
07/3i + See aversion, regret, expectation, surprise
Not a bed of roses.

The disappointment aversion is rather similar to the regret aversion (see that phrase), except that there is no self-attribution of
the "error".
One example is when a stock owner lose money because stock prices fall across the board and most other investors (and most
analysts / commentators / advisers ) did not warn or were warned about it. Thus the investor does not feel responsible to have
picked the wrong stock, does not regret his decision, but feel disappointed by the market itself.
Disappointment is asymmetric
People are usually:
More disappointed by outcomes that are less favorable than expected,
Than happy by outcomes that are above their expectations.
This fits the prospect theory (see that phrase) which found that people suffer more from a loss than from a lack of expected
gain.
See the general "aversion" article to see the relations between
risk aversion, prospect theory, loss aversion, regret aversion, disposition effect...
A paradox, as a reverse asymmetry is that people remember better successes than failure, which does not really help to correct
behaviors.
(investment) Discipline
See self control bias
Disequilibrium
See dynamical system, equilibrium
Disinformation
00/12i + see manipulation, deception, pump and dump, ethics, asymmetry of info, media
distortion, information distortion, misrepresentation
Disinformation is one of the tools of manipulation and deception (see those words).
To disinform (or misinform) is to, voluntarily,
Either disseminate false or at least misleading information,
Or hide true information.
In business / finance / politics, but also in everyday life, this deliberate action is usually done in the manipulator's interest or at
least in line with its agenda.
Less often, it is done for fanciful (trolling) or perverse (vandalism) purposes.
Disposition effect
02/1i - 02/7i,10i - 03/4i,5d- 05/5i,6i - 06/11i - 07/3i + see commitment, regret, loss
aversion, prospect theory, endowment, get-eventis, divesture aversion
I lose, therefore I keep. Strange, isn't it?

Definition: the disposition effect / aversion is the fact that often, in their assets portfolio, people prefer to sell (dispose of)
winners than losers.
They act that way
either out of pride / commitment,
or because of loss aversion / get-eventis (hope to recoup their loss, even at the risk of making it bigger),
or to avoid regrets.
They might be less prone to that bias if the money they manage is not their own (see house money effect) or if they are
experienced traders (meaning ...traders who survived).
Another thing is that people are committed to what they own, whether they are gaining or mot money on them. They are not
too keen on abandoning them as they feel that they would get rid of their riches (see divestiture aversion, endowment).
See the general "aversion" article to see the relations between
risk aversion, prospect theory, loss aversion, regret aversion, disposition effect...
Dissemination / diffusion (of

information)
(trend) disruption
00/12i - 03/9i + see transmission

See non linear, bifurcation, percolation, dynamical systems
(price, return, market) distortion See anomaly, mispricing, inefficiency

(statistical) Distribution curve
anomalies
Distribution / Accumulation
phase
Div
Due to their length, those articles are in a separate page of this "D" section of the
Glossary

Divesture aversion
Dividend puzzle
03/1d,2d
Why do they share the spoils? Or don't share them?

Shareholder invest to earn money, don't they? And their income is supposed to come from dividends, isn't it?
But the dividend policy differs from one firm to the other. To the point that, even if their profit and liquidity situation would
allow to pay dividends easily, some firms do not pay out any, or only small ones.
The puzzle
Imagine your financial advantage if you can pay with a signal instead of hard cash!
The puzzle is that, at least in buoyant times (*), many firms that do not pay dividends are still well-priced by stockmarkets,
in spite of that lack of direct income for stockholders.
That seems to be due to:
The stockholders' belief that a lack of dividend is a "signal" that the firms can make more
fruitful investment...
....in its own operations than the stockholder could do by himself by reinvesting somewhere
else if it received the cash.
Trust me, says the CEO subliminally, I'm better than you at creating value!
Also tax systems, which are usually not too favorable to dividends and much more in favor
of plowing in profit in the hope of capital gains.
That is why another version of the dividend puzzle is "why do companies give
dividends?".
(*) In harder times people like to see real money in their pockets.
Is this shareholder attitude rational?

The rationality of that belief by some shareholders in some periods that the money is better in the company's pocket than in
their own can obviously be questioned. For example it could be argued conversely that paying dividends is a signal that the
firm is making real profit.
At the other extreme, it would be irrational to venerate a company that would pay more dividends that it could afford for its
sustainability, a thing that might also happen.
Do - Dy
Dominant
mental
interest

Year/month,d: developed/ discussed, i: incidental
See cognitive overload, fashion, anchoring, dissemination of information, selective exposure, rotation, attention
Flavor of the month.
Collective dominant interest in markets

A market has difficulty to take into account all the complexity of the economic world. Thus, it shifts its interest from one factor to the other,
that becomes the new fashion. This new focus in the public attention is called the (collective) dominant anchoring / dominant mental
interest of the moment.
For example, for stock investors, usually under the influence of commentators, what is considered the key
factor to watch, can be alternatively
The interest rates,
Or the trade deficit,
Or the employment rate,
Or the inflation rate
Or the budget and taxes,
Or whatever other fashion of the day, linked either to domestic issue or to global ones.
This focusing can be used as a manipulation technique by informers who try to shift the public attention by using "red herrings".
Individual mental interest

Personal obsession of the day
Of course, the dominant mental interest is not just a matter of social fashion. An individual might also get focused / anchored on some
exclusive / obsessive thinking (or fantasy), attitude, behavior, which is either transient or permanent.
Domino
effect
See epidemic, contagion
Dotcom /
dotcom
bubble /
craze
See bubble, story
Doubt
See belief, uncertainty
Not too certain of certainty

Doubt is the opposite of certainty, or at least it is limited certainty.
As for certainty, it is either a result of objective evidence (*) or a subjective belief (see belief).
(*) But doubt could also imply some distrust even when evidences are strong.
Doubt and uncertainty

When facing economic financial decision, some uncertainty (see that word) is often present. The world is by nature an uncertain place, and
probabilities can be illusory. Statistics are only partly reliable as indicators of future probabilities.
In such cases, the decider has to find some position between belief and doubt, to decide where to place the "degree of belief vs. doubt"
cursor. Somewhere between 1% certainty and 99% certainty.
Some decision-making tools might help in those cases, such as Bayesian probabilities, fuzzy logic...
Dynamical
systems
Due to its length, this article is in a separate page of this "D" section of the Glossary
(*) To find those messages: reach that Behavioral-Finance group and, once you are there, 1) click "messages", 2) enter your
query in "search archives".
Members of the Behavioral Finance Group, please vote on the glossary quality at BehavioralFinance/polls
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Behavioral finance glossary: letter E, peter greenfinch
Behavioral finance FAQ / Glossary (E)

A B
Ec -Ef
Full list

Economic man
01/1d - 08/4i+ see rational choice
Here is the economic super-smart, hyper-cool superhero, but not

always at work.
Definition: the economic man or "homo oeconomicus" is an allegory that is
supposed to represent a rational person who takes his economic decisions
by making correct analyses and maximizing his self-interests. Or at least
doing what is best to reach its economic goals.
This allegory expresses the "rational choice" theory (see that phrase).
How the economic man is supposed to behave

Smart and getting the best from the cake.
Such a rational economic person is supposed to combine two traits:
He is perfectly informed and he makes correct analyses:
of the economic situations and prospects,
of the behaviors of the other economic players.
His decisions and actions always maximize the satisfaction of his
economic interests / goals.
Or at least, if we expand the concept somewhat outside the economic
world - as the boundary between economy and life in general is fuzzy
- those decisions fit strictly his hierarchy of "preferences": see that
word.
As a consequence, this bionic (?) man is not supposed, when it makes
decisions - to take or not to take actions - to let cognitive deficiencies or
emotional biases override its rationality / efficiency.
Does this guy exist?

As research in behavioral economics (see that phrase) has shown, those
assumptions do not fully match how economic decisions are taken in
real life.
Those assumed traits can only be used as approximations to make
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simplified economic models.

Elements of adaptations and flexibilities have to be added to the
parameters to reflect reality better.
(market) Effect
See perverse
effect,
calendar
effect, size
effect, P/E
effect, etc.
Same lack of cause, same effect?

A market effect is a specific type of anomaly, inefficiency.
It is a discrepancy in price and return
That is not explained by economic fundamentals
But that it so recurrent (*) that it seems to obey its own law and
therefore might not be fully anomalous.
(*) Beware anyway, some pundits and investors become sometimes
overconfident in trying to take advantage of those effects. This becomes a
fad, which at the end dissolves itself and the effects into irrelevance.
The calendar effect, size effect, P/E effect (see those phrases),
election cycle (in the US) are well known cases.
The appellation is also given to less systematic, but well
categorized, behavioral phenomena (perverse effect...)
Efficiency, (in-) efficiency

(economic, technical)
Efficient market hypothesis
Efficient (market, price)
Due to
their
lengths,
those articles
are in a
separate
page of
this
"E"
section
of the
Glossary
Eg -Em

(primacy of the)
Ego
See narcissism, overconfidence, pride
(return, price)
Elasticity
See beta coefficient for elasticity / sensitivity in

finance
EMH
See Efficient Market Hypothesis
Emergence
See bifurcation, percolation, dynamical, equilibrium
The worm breaks through its cocoon and emerge as a butterfly.

Definition: emergence is the apparition of new characteristics in
evolutionary systems, such as life, the universe and ...markets
In dynamical and complex systems, multiple interactions and bifurcations
(see that word), might give birth to:
Self-organization, some order and (dynamic) equilibrium instead of
chaos / disorder, some common behavior not just a collection of
individual behaviors.
Simultaneously or as a step further, emerging traits / behaviors. In
other words, new characteristics appear that were not seen before.
We have here something that is the opposite of entropy, from chaos to
organized patterns and directions (disentropy)
Crossing the threshold

The other side of things.
That newly found order, and those new traits, emerge after the system
reaches a critical threshold, for example after accumulating enough
energy or a large enough mass (critical mass) or enough individual
components.
Then the system enters a new and quite different phase of its evolution.
Sometimes the change is not reversible.
This is studied in physical sciences (self-organization, percolation), but it
is also quite present in human and social sciences.
See the "percolation" article for more details
Kinds of emergences, and examples in economic and

financial evolutions
That phenomenon has its place in economic evolutions, for example in
diffusion of innovations, emerging countries, emerging industries, and last
but not least, asset markets orientations.
Some knowledge of how dynamical systems (see that phrase) work

is needed for investors to detect such crucial shifts among the more
ordinary "noise".
Those emergences can be categorized into:
Weak emergences (the new traits existed potentially in the previous
state or phase).
An example is when a stock changes its profile from growth to
cyclical.
Strong emergences (the system is fully transformed into something
else).
An example is a break from a traditional economy or a state economy
to a market economy..
Emotion,
emotional
Emotional bias
Emotional
intelligence /
literacy / reasoning
Empathy
En - Ep
Due to their length, those articles are in a

separate page of this "E" section of the Glossary
See genetic utility, ethics

Endowment effect
Entrepreneur
psychology and
behavior
Epidemic

page of this "E" section of the Glossary
00/12i + see meme, diffusion, percolating, viral
communication, salience, contagion, systemic risk
Definition: epidemic is the stage of diffusion of an "infectious" agent when

it starts to self-replicate at an increasing speed.
This medical parallel can be applied to some information or even rumors,
which raise a sudden popular interest and spread rapidly, while others
never find an audience and recognition outside small circles.
In the worst case scenario, such contagion can bring a systemic risk /
crisis. When the fall of a financial institution brings a distrust of another
one, leading to its fall, and distrust in other ones, until the whole system
can collapse in a domino effect.
Eq

(dynamical)
Equilibrium
00/6i,8i - 07/5i + see feedback, dynamical systems,

emergence, percolation
Keeping one's balance by always moving.

An equilibrium is in a popular approach often confused with stability
when all factors are in balance and things will not change except in case of
external shock.
This is quite reductive, as in economics and finance, like in life in general,
and in all other "dynamical systems" (see the related glossary article),
things are always instable to some degree. Thus, what is called an
equilibrium or balance (for example equality between potential supply and
demand) is never static. It is a temporary adjustment of factors between
two periods of disequilibrium.
Equilibrium in economy and finance

Push and pull
So many factors (among them human ones) and so many possible changes
take place in the economic and financial world that it is a typical complex
and dynamical system, as mentioned above, that cannot reach a perfect and
static equilibrium.
The aggregate data that show the state of the

economy (growth rate, inflation rate...), move
therefore:
Either alternatively above and below the
statistical mean,
This is the case when the feedback (see that
word) brings corrections from one side to
the other (reversion to the mean or to the
extremes, negative feedback).
Or, on the contrary, farther and farther from
the mean, in a spiral or cobweb; from the
theoretical equilibrium,
This happens when the feedback get inverted
(positive feedback).
In the same way, in financial markets an equilibrium price is reached
between bids and asks any time there is a transaction, but it is unstable
equilibrium, it is usually changed with the next transaction.
Of course there are periods of quasi stability (low volatility, see that word)
and periods of high instability / high volatility), another trait of dynamical
systems. Those variations of volatility are measured by
"heteroskedasticity" (see that word).
Equity premium,
equity risk premium
puzzle
03/8i - 04/2d,6i,10i - 05/6i - 07/5i + see risk

premium
Definition: the equity premium (EP) is the average difference of returns

between:
Market-listed stocks (the average reference being the stock index),
And treasury bonds, which returns are normally considered the
benchmark for riskless investment.
The puzzle this notion entails is detailed in the risk premium article in this
glossary
Et - Ev

Ethical, ethics (in

decisions / info),

(getting) Even, getSee loss aversion, cost averaging

eventis
I want my money back!
Definition: getting even is the human tendency:
Not to sell a losing investment until recovering the initial price paid,
Or even to increase the amount of the bet in the hope to recover
quicker the money that has been lost.
This is a biased approach of "cost averaging", a strategy that might be
useful but which has its limits.
This is the emotional aspect, derived from loss aversion (see that phrase),
and stubbornness. But that might also reflect a cognitive bias, an anchoring
in past prices as if they were still the fair value.
Evolutionary
economics / finance
02/10i - 05/2i + see dynamical systems, percolation

thresholds, survivor bias, fuzzy logic
Evolution is about replacement, adaptation and survival

Definition: evolutionary economics / finance is a kind of Schumpeterian
microeconomics / finance approach adapted to complex system (biology is
the main inspiration).It takes into account multiple interactions,
adaptation processes and the idea of survival of the fittest.
Adaptation by approximation
Every time better.
In this evolutionary theory, what behaviorists might consider behavioral
biases, are semi-rational heuristics, operators try to adapt to changes in the
environment, not by aiming at an optimum solution, but at least at an
approximately satisfying one.
Then competition does the rest of the work, until a new macroeconomic
(quasi) balance is reached (thus "adaptive market" is another label for this
field).
This creates permanent instability as, in such a dynamic process /
dynamical system, the equilibrium (see that word) changes all the
time. This is also a bit similar to fuzzy logic approaches.
Darwinism among investors?

It seems that seasoned investors have less behavioral biases (see that
phrase). It might be just because, in a Darwinian process, only the smart
ones survived, but this explanation might have its own flaws (see "survivor
bias")
Exe - Exp

Executive behavior 06/2i + see behavioral corporate finance

(mathematical)
Expectancy (of
value)
Expectancy
bias / effect
(rationalmimetic)
Expectations
Expected return

separate page of this "E" section of the Glossary
Expected utility
See the "utility" article for a full definition
Expected value
See (fair) value
(illusion of)
Experience
04/ 3i + see definition at "overconfidence"
Experimental
(micro)economics /
finance
00/6i,7i - 01/1i,3i - 02/5i,6i,7i - 03/1i - 05/1i + see

behavioral economics, game theory + bfdef3
Economy in the lab.

Experimental economics is the use of "in vitro" methods (group games,
role playing, or individual experimentations, questionnaires) which
purposes are:
to understand how people or groups of people take economic or
financial decisions,
to observe the results of such decisions on those people specifically
and on the economy more generally (for example the effect on prices,
on growth...)
It is a practical approach that differs from a theoretical one, the game
theory (see that phrase) and which can give different results. But there are
some relations between the two fields of research.
Ext

(market)
Externalities
00/1i - 08/3i + see unintended consequence, ethics
Beware of your car leaks, somebody can trip on the oil

patch.
Definition: in economics, externalities are beneficial or detrimental,
conscious or unconscious, consequences of the actions of some economic
players on other players.
All players with a direct or indirect interests that can be affected by the
decisions of one of them are often called "stakeholders".
Here are two examples:
(negative externality): the cost of the pollution created in a given
industrial market could fall on other actors who have no direct interest
in that market.
(positive externality): non travelers who are real estate owners can
benefit from a new motorway or railroad if it makes more attractive
the local real estate.
A way to "internalize" those effects is to have the responsible parties pay
for the damage (or to give them a share of the benefits).
Externalities are often unforeseen (see unintended consequences)
(law of) Extremes,
extreme risk
02/10i - 03/12i - 04/9i,11i + see distribution

anomalies (Pareto power law), reverting, over/underreaction, fat tails, tail risk, long tail, risk
Aversion to the middle?

The law of extremes states that economic / financial data are usually
unstable and
Neither evenly distributed,
Nor concentrated around the mean (thus not really matching a
Gaussian distribution),
Nor always reverting to the mean.
It states that those data tend to, on the contrary:
Focus on extreme values (Pareto "power law"), as is the case for
prices in case of bubble or crash due to herding and overreaction.
Or at least have fatter tails (see fat tails), corresponding to more
extreme and less rare events than usually expected.
This is called tail risk (see that phrase) or extreme risk.
Or some other combination, either asymmetric, or symmetric with
an extreme concentration in the middle and to small concentrations at
each en (see leptokurtosis).
Pgreenfinch's stock image model takes into account a range of extreme

image coefficients.
Extrinsic value
See the (extrinsic) Value article.

"search archives".
polls
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Behavioral finance glossary: letter F, peter greenfinch
Behavioral finance FAQ / Glossary (F)

A B
Fa - Fai
Full list

FA
See Fundamental analysis
Fad / Fashion

page of the "F" section of the Glossary
Fair (deal) /
unfair
07/10i - 08/6d + See fairness
Fair price /
value / valuation

Fairness
See ethic, economic man, fair price, cheating,

moral hazard, altruism, common good, genetic
utility
No fairness, no deal!
At the difference of the theoretical "economic man", people often take into
account fairness to others (which can be defined as a sense of equity, of
justice) in their economic decisions.
Some of their behaviors put what they consider the "common good" above
their own economic interests
Also, they expect fairness from their counterparts.
For example:
When they do transactions, people might strive to - or argue that they
strive to - do it at a fair price (see that phrase) to all parties, whatever that
means.
Studies have shown also that people usually do not accept a "take it
or leave it" offer that they consider too unbalanced.
Many will reject that unfair "ultimatum" as an abusive moral pressure
and indignity, even if they would have gained a small amount of money
by accepting it for a lack of a better choice.
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Fal - Fat

(logical) Fallacy

Fallen angel
03/9i + see fad / fashion image types
Stocks that got burnt in the stratosphere and shoot back to Earth.
Definition: Fallen angels are stocks that were highly fashionable (see fad /
fashion) to investors at a time but that are now distressed.
Their market price is thus very low. Some have even become penny stocks,
but not all penny stocks have been angels at a moment of their market
career.
Fallen angels had their moment of glory with puffed market prices (see
glamour stocks). It lasted until investors discovered that their prospects
were illusions (if they had kept those prospect they might have become real
growth stock). Then their price started to tumble.
Since then they have been rolling inexorably downhill, as miracle rarely
happen. Let us say it occurs only in a small percentage of cases, even in the
world of angels.
What are they worth?

Cheap angels.
Some fallen angels might be value stocks (see that term), but for most
others, the recovery probability is usually very low.
Often, no economic value can be calculated. But as long as bankruptcy
doesn't strike those distressed stocks, which often stay in artificial survival,
their market price does not fall to zero. Sometimes a round number, 1 Euro
or 1 $ for example, becomes subjectively the pivot price or the extreme
price.
Periodic speculations might happen around that very low price (the
attraction of "small caps", often manipulated using "pump and dump"
techniques, see that phrase).
Some consider that they should be priced as options, with a calculation
based on their beta (see that word). But here comes the problem to define
the strike price, unless admitting it is zero.
Familiarity
07/5i + see home bias, neighborhood effect
Investors tend to invest in activities and businesses they feel close to (home
bias).
Another aspect of familiarity is that when an opinion is repeated, if only by
the same person or source, it tends to become familiar and seems relevant.
Repetitions can make believe in truth!
Fashion
Fat tails / wings
(in distribution
curves)
Fe - Fr
See fad

(Greed &) Fear
Feedback loop /
positive feedback
Feeling

See emotion, pain and pleasure
Feelings are physiological perceptions that come either from physical

stimuli or from emotional reactions to situations (see emotion).
They are more or less pleasurable or painful (see pain and pleasure) and
have an influence on decision-making.
Female investing
05/6i + see gender attitude
Fluctuation
See cycle, volatility
Focalism,
focusing effect
Follower
See anchoring, reductionism

See trend following, mimicry, herding
Foot in the door
Fractals /
Multifractals
00/12i + see commitment + bfdef2
00/6d,7d,12i - 01/11i - 02/4i - 03/12i - 04/9i,10i +

05/2i + see chaos theory, nonlinear + bfdef3
Zigzagging Russian dolls

Definition: fractals are broken or branching out lines (non-linear patterns)
with specific properties:
The same type of variations seems to repeat itself visually.
Also small variations follow the same shape / pattern than large ones.
That phenomenon by which similarities repeat at different scales is
called "scaling" or "scale invariance".
The study of fractals is a branch of the complex dynamical system theory
(chaos theory).
Fractals, multifractals and market prices

Stock price charts tend to look like fractals. Large price variations (in
several months or years) are often roughly visually similar, but in a bigger
scale, to daily ones.
They might also be analyzed as intermingled fractals (multifractals).
Frame
(dependence) /
Framing
Fu - Fz


Fund manager /
management
behavior /
performance
08/6i + See peer pressure
Fund manager are often accused of sharing various common professional

biases, such as overtrading, peer pressure... This is a debatable
generalization as everyone has its own style. But it is true that some
contagion can take place in some market circumstances.
There are some ambiguities about measuring fund performance (the
famous "alphas") and finding relevant benchmarks.
Popular indexes are misleading,
They are focused geographically on only one market, do not represent
that entire market and do not include dividends.
Relative performance can be less relevant than absolute performance.
An efficient manager should not get stuck to ape an index in bearish
times (except of course is the fund is specifically sold as an indexrelated fund.
Also cost information is usually not fully transparent
Life cycle
It is also often advised not to rely on a manager's recent performance, as
its style (and / or its computer trading system) might have been perfectly
adapted to a past market situation but it might be inadequate when the
market enter new grounds.
It might be better to hire the managers (or invest in the funds) wich have
shown the worst performance in the, say, last three years than those who
were the market stars in that period.
Fundamental
analysis (FA),
valuation, value
Fundamental
financial data

separate page of the "F" section of the Glossary
Fundamental
investors / traders
Funnel effect
01/1i + see liquidity squeeze
Traffic jam at the expressway exit ramps.

A funnel effect takes place when an important flow (of liquid, gas, traffic,
or ...money) has to go through a narrow passage.
In financial markets, it occurs when too many people try to buy or sell,
with few counterparts.
The result is an illiquidity/ liquidity squeeze, in which the price of an
asset can rise or fall strongly before transactions can take place and a
stabler equilibrium is met.
Why does it happen?

This phenomenon is due either to:
Pure physical scarcity of money or assets,
Or excessive greed, panic, herding, when everybody wants to buy
or sell at the same time,
Or a self-reinforcing combination of both.
Fuzzy logic

(*)To find those messages: reach that Behavioral-Finance group and,

once you are there, 1) click "messages", 2) enter your query in
"search archives".
polls
Back to BEHAVIORAL-FINANCE
GALLERY
Home / accueil
Disclaimer / Avertissement lgal

Behavioral finance glossary: G-H, peter greenfinch
Behavioral finance FAQ / Glossary (G-H)

A B C D
E F G-H
I-L M N-O
P-Q R S T-U V-Z
Full list
Gam - Gar
Gamble / Gambler / Gambling

Gambler's fallacy / paradox
Due to their length, those articles are in a separate page of the "G-H" section of the Glossary
Game playing
Game theory
00/6i,10i - 02/02 - 04/9i + see heteroskedasticity, distribution, volatility, stochastic + see bfdef3 site link
GARCH / ARCH models

Watching the dancers moves, from a tango to a waltz.
GARCH and ARCH models (GARCH = General auto regressive conditional heteroskedasticity) are mathematical tools that measure how volatility evolve, how variable and
instable it is.
They are used, for example, in financial markets. Some financial assets see their price to rise or fall more or less erratically, with a price volatility that changes with time.
Volatility often increases in periods of high uncertainty, after some unexpected and hard to gauge event.
More generally those statistic-related tools are used in stochastic calculation (see that word). Their purpose is:
To take into account instability (non-constant variance / non-constant deviation: see heteroskedasticity) in time series.
To include those measures in probabilistic valuation or prediction model.
Ge - Go
Gender attitudes to money management

.08/2i + see style
Mars and Venus?

Studies have shown that, although generalization should be avoided,
Female investors would be more risk averse, less optimistic and less impulsive in their decisions than male investors.
They might avoid adventurous investments, but on the other hand would get lower overall return.
* Young males see their testosterone level increase strongly when facing decision and tend to take more risky and irrational ones.
Other differences are between wealthy vs. poor (risk is a different thing for them), young vs. old (they have normally different time horizons)...
Generalization
See reductionism, heuristic, stereotype
Genetic algorithm, computing

Genetic utility
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Get even bias, Get-eventis
.See commitment, cost averaging, loss aversion

03/5i,9i - 05/1d +see fashion, growth stock + image types
Glamour stocks
Investors' darlings.
Glamour stocks are highly popular stocks ("hot" stocks).

Most investors attribute them extraordinary qualities and growth prospects.
In parallel, their price rises in a spectacular way. Those fashionable stocks tend to become overpriced, their image coefficients reach stratospheric heights. Investors tend to
delude themselves in their appreciation and to overpay such investments.
Their fame is due to:

Their past economic performance (cult companies),
People might think that such past trend is representative of the future trend (see representativeness heuristic).
An increasing information flow about their price rise, as it get noticed by more and more people and media.
That information surge tries to present, comment, detail or explain that rise (see availability heuristic), usually with enthusiasm if not delirium.
This voluntary or involuntary "spin" might take place even when the company has nothing to support those positive expectation: no profitability record, nor very clear
and credible future earnings scenarios.
There are two main types of glamour stocks, which it is important not to confuse.
Beware of counterfeit growth.
1) Some of them are legitimate "growth stocks" (see that phrase) but often overpriced.
2) Others are "shooting stars", as extremely fast rising stocks, but with illusory qualities.
They might become later ..."fallen angels" (see that term). They might be OK for very short term trading, often with high risks entailed, but much less or long term
investment.
Goodhart law
See numeracy, reflexivity, observer bias
The Goodhart law is a symptom of numeracy bias: when a statistical indicator is widely used as a target, behaviors start to change. People try so to meet the number instead
of trying to reach the real purpose behind.
Thus the number gets biased, or even manipulated, and loses its value as a benchmark.
Statistics should always be taken with some doubts, under the appearance of solid realities, they might cover real uncertainties.
Gr
Greater (or bigger) fool delusion

04/9i + See rational expectations, mimicry, cascades, herding, pyramid, overconfidence, bubble
Hoping my naivety will be surpassed by the next sucker.

Definition: the greater fool delusion is buying an extremely overpriced asset, after a long price uptrend, with the idea that a greater fool will buy it later at an even higher price, before the music
stops and the price crashes down.
That phenomenon by which investors keep on buying (or avoid to sell) assets although they know that they are overpriced, is one of the factors that help bubble persist and grow.
How to explain that behavior?

That assumption that there is a good chance that somebody else will do the same assumption and will catch the grenade before it explodes has its own rationale.
But it can also be a delusion, as the investor has no certainty than the pool of greater fool will not dry up in the immediate future. In that case the greater fool will be himself.
There is here some overconfidence (see that word) as the investor feels he will be the one who find the right time to sell before the other foolish investors will start to sell massively
Greed (& Fear)
Group behavior
Due to its length, this article is in a separate page of the "G-H" section of the Glossary
00/12i - 03/7i + see groupthink, genetic utility, herding, peer + bfdef2
Sticking with friends.

As is the case for groupthink (see below), individual behaviors are influenced by the group(s) to which those people belong or are related.
In a group, people may lose their individual inhibitions and adopt a common behavior even if it becomes excessive or irrational.
Group behavior in markets

In markets, people might be influenced by the other operators.
That behavior might make prices deviate from estimates that would be based on an independent and rational rewards / risks analysis.
Some agent-based models (see that phrases) use "behavioral" algorithms (see mathematical psychology) that are supposed to predict how participants in the "investing community" will interact
and the consequences on prices.
Groupthink
00/12i - 01/1i - 02/10 - 08/19i + see group behavior, consensus, (common) beliefs, peer pressure, conformity
Better live happily together than decide what is best.

Definition: groupthink applies usually to faulty analysis and decisions made by groups dominated by the wish to avoid conflicts. In that case this wish is stronger than the aim to do a rational and
full analysis of the issue itself.
An excessive desire to reach a consensus (however rational could be the motives to preserve the group cohesion and goals) sometimes deteriorates mental efficiency, reality testing, and moral
judgment.
Normally, in a group, people are supposed to analyze things better than they do individually, by combining information and ideas from all members. This is sometimes called the "wisdom of
crowd". This concept is debatable and a bit illusive, as emotions can interfere and individuals become often "under influence". They tend to abandon they own ideas and to adhere to the group
majority thinking.
Growth investing / Growth stock
01/6i - 02/8i,10i,12 - 03/1i - 08/6d + see value investing, fundamental analysis, glamour stock + image types
Buying for the price or for the growth rate?

Definition: growth investing is picking stocks on the basis of their past and expected future earnings growth (growth stocks).
It is sometime opposed to "value" investing, a style of investing which, in its most simplistic application is more interested in the stock present earnings compared to its price.
Growth investing might be done by choosing stocks:
Either on the basis of strict fundamental criteria about the business growth prospects and the stock valuation (prospective analysis and valuation).
Here the trick is to find stocks that are undervalued in relation with their growth prospect.
In that case, the difference between what is called a growth stock and what is called a value stock is not too large.
Or on the contrary by extrapolating the past growth into the future, and without being too much interested in the price paid.
Here similarities might be seen with trend following. This could be called a naive growth strategy
Gu

See attribution, disinformation, greater fool, illusion, magical thinking, manipulation, rationalization, story, wishful
thinking, etc..
Gullibility
People have a tendency to believe certain things or certain people without digging further sometimes against any reason. This is gullibility.
It explains many human and social interpretations, analysis, attitudes, decisions and behaviors.
This glossary show many forms and consequences of that bias: attribution, disinformation, greater fool, illusion, manipulation, rationalization, story, wishful thinking, etc., not
to forget self-delusion
Gunning
See funnel
Gunning is a specific funnel effect in financial markets, resulting specifically from technical analysis and stop loss orders.
It might happen that a quantity of people (or computers), who use the same chart analysis or program trading method, place stop loss orders (either as a hedge or as a
speculative move) more or less at the same price. If it is a shallow market, the price equilibrium can be reached only with an exaggerated price change.
Guru
00/6i,8i + see obedience, manipulation
Love and follow at your own risk!

Often, groupthink or crowd behavior is directed by one or several manipulative / excessively charismatic leader(s) or guru(s).
They gain a strong influence (based on excessive trust / blind admiration / passionate love, sometimes coupled with fear) on the other participants.
This goes to the point of short circuiting their own capacity of thinking or even enslaving them or making them adopt excessive and damaging behaviors.
Investment guru, although their power are rather diffuse can have a strong influence on investor behavior
Ha - He
H coefficient, exponent
Habit
Halo effect

03/12i + see Hurst coefficient
See avalialbility heuristic
Beware, not all quadrupeds are cows.

The halo effect is a mental bias in which we apply - wrongly - what we know or feel in a domain to another field. This is a kind of availability heuristic (see that phrase).
As an example, basing economic previsions upon negative or positive political principles can be misleading.
Heavy tail
See fat tail
Hemline theory
See (social) mood
Herd instinct, behavior, Herding

Heteroskedasticity
00/10d - 01/11i + see ARCH / GARCH models, volatility, (volatility) cluster + bfdef3
Welcome to "heteroskedasticity", the BF word which is the champion in the number of syllables,
You can count eight of them (this is immediately followed by "representativeness" with just one less).
Definition (general): heteroskedasticity is an an unequal variance between statistical variations.
Definition (market finance): In market prices, heteroskedasticity takes the form of unstable volatility.
It is an alternation / regime switching between periods of higher / lower volatility, It could be called the "volatility of volatility". See also (volatility) clusters, cycles.
How to measure it?
Heteroskedasticity is a probabilistic / stochastic (see that word) phenomenon that can be measured in statistical time series by using ARCH / GARCH models (see those
acronyms)
Heuristic (bias / shortcut / limited)
(availability, representativeness) Heuristic
Hi - Ho
Hindsight bias

00/6i 03/11i + memory, mental account, survivor bias + bfdef2
I knew it before it happened!

The hindsight bias is the idea, after an event, that we knew that it would happen, even if we didn't have any opinion, or were not so sure about it, or worse if we thought
something different.
In finance, this bias affects investors who have forgotten their original estimates or objectives,
When seeing the outcome, they are likely to use it as an anchor (see that word) and to assume their estimates must have been close to it. They think they predicted from the
start what finally happened, with the motto "I knew it all along and always told so".
This anchoring can also lead them to unrealistic expectations for the future, either overconfidence or underconfidence. It can create the idea that uncertainty does not exist as
you can easily predict things.
Home bias
01/2i - 02/9i + see neighborhood effect, availability heuristics
If I feel that all goodies are at home, why wander outside in the big world jungle?
Definition: the home bias (or "proximity bias" or "familiarity bias", or "neighborhood effect") is a rather common tendency by investors, mainly stock investors, to put a too
big share of their money:
In their own turf / backyard (own country, region, firm...), this is pure home bias,
And in things they see everyday (familiar companies and industries), this is neighborhood effect
Is this tendency rational?
This kind of primitive / instinctive selectivity has its pros an cons:
Pros:
The home bias might avoid mistakes that could be due to venturing into unknown territories,
Cons:
It might rest on an illusion of knowledge and information
For example people investing in the same business in which they work can have a double bad surprise if something goes wrong for that business.
Such a narrow approach of investment leads to an over-concentration on a few assets and goes against risk diversification,
It is also an obstacle to find or exploit better or safer opportunities, that globalization and business evolutions offer
It can be compared to an "anti-selection" as insurers say, even if it has the merit to focus on what investors (might) know well.
Hope (& fear)
See greed & fear, optimism, wishful thinking
(investment) Horizon
03/4d + see time horizon
Hot hand
See overconfidence
House money effect
.02/10i + see endowment effect, mental compartment
Serious money vs. fun money.

People are usually rather cautious on the risk/return prospects when they invest their hard earned savings. But not all moneys are considered worthy of the same care (see
mental compartments). Therefore they usually become less timid when they invest certain types of funds:
Money they manage for others
(although, sometimes it can be the other way round, as they get less passionate, less dependent of greed and fear when their own
prospects are not at stake),
Or (nouveau riche effect), money that was easily, unexpectedly, suddenly earned or got by chance.
Or, more simply, surplus money.
Investors are usually careful when investing their initial savings, or reinvesting that initial investment. But once this operation rewards
them with profits or revenues (house money), they take more risk when re-investing that surplus.
On the other hand, let us look at the bright side, they are in those cases less prone to the disposition effect on such assets when their value is falling, as long as there is some
gain left. This is also because their "reference point" in the "prospect theory" (see that phrase) is their buying price.
Hu- Hz
Hubris

04/4i,10i - 07/7i + see overconfidence, narcissism, pride
Hubris is an excessive pride (narcissism) or presumption (overconfidence) that leads to not well-thought decisions with negative consequences.
Hurst coefficient, exponent
01/3i,10d,11i - 03/10i,11i,12i + see H coefficient, persistence, long memory
Definition: The Hurst coefficient (or H coefficient) measures statistically the persistence of a phenomenon..
It is a number that measures, in a sequence of historical data, if there is a persistence of some patterns (market trends for example).
If the coefficient is above 0.5, the trend is considered persistent and to have a "long memory".
Under 0.5 the trend is considered to be in decay or inexistent.
Hype
04/8i + see manipulation, spin, pump and dump
Hyperactivity
05/10i + see overtrading, noise trading, attention disorder, boredom
Hysteresis
02/05i + see lag, latency, underreaction, delaying tactics, cognitive overload, diffusion, cycle
The magma may take time to erupt.

Definition: hysteresis (commonly called lag, inertia...) is a delayed (lead-lag) or slow response (underreaction) to an event. It is a phenomenon found in physics (magnetism)
but also used as an allegory concerning reaction to information.
It is due either to:
1) a slow, and not immediate, diffusion of information (see that phrase),
2) or a slow understanding of its importance for the future (because of cognitive overload, and sometimes of cognitive dissonance)
3) or an underreaction in taking decisions and acting accordingly, due to collective or individual psychological biases (procrastination, delaying tactics...).
In markets, that underreaction creates a price, or price trend, "stickiness".
(mass, crowd, collective) Hysteria
02/7i + see crowd, mass, herd, fad
Collective hysterias are extreme forms of herding, such as collective panic or collective greed delirium...
In stockmarkets those mass behaviors lead to exaggerated rise or fall (bubbles and crashes).
Home / accueil


Behavioral finance glossary: I-L, peter greenfinch
Behavioral finance FAQ / Glossary (I-L)

A B
Il - Im
Full list

(rational)
Ignorance
08/3i + see cognitive overload
Rational ignorance is to shun the quest for extra knowledge that would cost
more than it would yield. In other word it applies when the cost to get more
knowledge is higher than the gain that might be obtained when using that
extra knowledge in decision making.
Illiquidity
Illusion of
competence,
experience,
knowledge
Illusion of control
(stock) Image
coefficient
Imitation
See liquidity squeeze

Due to their lengths, those articles are in a
separate page of this "I-L" section of the
Glossary
page of this "I-L" section of the Glossary
02/4i + see trend following, mimicry, learning,
cognitive, herding, cascade
Why re-invent the wheel?

To imitate other people is a natural human trait.
Since birth, social learning (see 'learning') is done by imitating the people
around, in practice by observing them and replicating their behavior.
This process combine two aspects:
Cognitive: learning by seeing, hearing...
Affective, linked to the feelings of proximity and community
experimented towards other people
Some people learn also by opposing other people, but counterdependence can be a kind of dependence, not to be confused with real
autonomy.
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Effects of imitation
Aping can help, but it is not an all-road and all-weather substitute
for thinking.
Imitation has advantages in building knowledge.
But often it is done without wondering too much about its relevancy, or
whether past knowledge will adapt to new situations.
Thus it leads sometimes people to:
Neglect other information that contradicts
what they learnt. This is a form of cognitive
bias (see selective exposure).
Oversimplify the way they decide their
actions.
When the world around them becomes
different, they might not check if the
automatic modes they learnt (common
heuristic, habits, routines) are still well
grounded. Thus they would not update their
way of doing.
In financial markets imitation / mimicry (see that word) can lead investors
to follow price trends without wondering if they are economically
justified.
Ina - Ind

Inaction
(perverse)
Incentive
See indecision, status quo bias, delaying tactics

04/11i + see perverse effect / incentive, unintended
consequence, moral hazard, principal-agent, signal
Stick and carrot

Definition: incentives are usually a system of rewards / penalties. They are
an important field of economics.
What they are used for

They are seen as necessary to reach collective goals.
They are included in tax systems to foster some economic or
humanitarian goals via tax advantage
They are also a tool or in human resource management to create
stimuli.
Also they are used to monitor executives as a way to limit the
principal-agent problem (see that phrase).
Are there drawbacks?

Those incentives can have perverse effects (see the related article in the
glossary) and unintended and counterproductive results, as:
They can verge on manipulation,
Their effectiveness is often a matter of chance,
They can sometimes give the wrong signals, making people neglect
some other crucial goals or risks,
They can create loopholes and moral hazards,
Their relevancy can dwindle as people start to manipulate the
statistics (see Goodhart law) or even cook the accounts.
Indecision
07/10i + See decision, delaying tactic, status quo bias
(non)
Independence, (non) 00/6i,8i - 02/8i + see distribution
Independent (in
.
decision distribution)
Minds that are glued together
For a series of statistical data to have a pure random distribution, the
phenomena measured should be "independent".
This means that they should not be linked to each others and the frequency
of an event should not depend of the frequency of another one.
In the stock market, for the distribution (of prices, returns, etc.) to be
random, independence should relate:
Not only to fundamentals (there should be a sufficient diversity of
firms),
But also to the market players' psychology. They should normally not
always have the same attitudes and analyses and take the same decisions.
In practice, the stock market data distribution fails to obey entirely the
independent psychology condition, as investors tend to contaminate /
influence each other in their decisions.
Ine - Ir

Inefficiency,
inefficient
Inertia
Information
(incidence of,
reaction to)
Information
anomaly
Information
asymmetry
Information bias
Information
cascade
Information
dissemination
Information
economics
Information
overload
(mental)
Information
processing
Intrinsic value

See hysteresis, delaying tactics, status quo bias

Glossary
02/12i - 03/2d 04/4i - 04/5i 05/10i + see (fair /

intrinsic / economic) value, extrinsic
Investor
psychology / style

Irrational,
irrationality
01/8i,11i - 02/4i,7i,9i,10i - 03/10i;- 04/4i,5d,9i 05,1i + see rational, rationality
Was it stupid?
The words irrational / irrationality are obviously the opposite of rational /
rationality.
When an individual or collective action is performed, an irrationality,
either in the observation of the situation, in the analysis or in the decision
can interfere.
Here a behavioral bias (see that phrase), of cognitive or emotional origin
is at play.
How to spot it?

The problem is that in many cases, it is not too easy to qualify an action as
rational or irrational:
It depends on the definition of rationality: see that word.
It can be judged only post-facto, when seeing its outcome.
And - which is more difficult - judged only after trying to take out
the role that pure luck / unluck played on that outcome ;-)

January effect
(Markovian,
quantum) Jump
See calendar effect + 05/12i

See percolation, quantum leap, non linear,
bifurcation.
Jumping beans in the market stall.

Sometimes, abrupt and important changes are seen in time series of
statistical data. A rupture in a linear or fuzzy evolution, called a quantum
(or Markovian) jump.
They can be linked to some cycle that is proper to the system and that will
self-correct, or to some deeper evolution of the system. They signal
therefore:
Either a rare unexpected accident (see rare event, small number)
which is temporary, completely compatible with the system, and not
really altering its random law
It just shows that the statistical "distribution tail" is longer than the
previous short statistics or small samples have shown.
Or the breaking of an old trend and the start of a new one, here
again without changing the system itself
Rain and sun alternate, but the climate itself for a given area
changes very few year after year (whatever the butterfly wings do,
the system is rather "robust").
This is the case when a "bubble burst" or when a currency loses
value suddenly (see the peso problem anomaly). It does not change
the bases of the economic / financial system.
Or a more fundamental mutation of the system itself, that leads to
a totally new, and sometimes irreversible state or situation, with
emerging traits.
It is usually due to a percolation above a critical threshold. Here, the
quantum jump represents only the quantitative aspect of the
qualitative evolution that is behind.
The famous / infamous "new economy" (and "new finance / new
capital", with the role played by the derivative market, by trading
on line or by other financial innovations) is an example.

Kiss of death
Knowledge,
Knowledge
acquisition
See winner's curse.

01/9i + see information learning, paradigms,
common conventions, memetics, (illusion of)
knowledge
Knowledge, and its main components, information and learning (see those
words), are becoming the most powerful engine in today economies.
The problem is that individual as well as collective knowledge and
information are often biased, as a byproduct of cognitive and emotional
biases. Whence various flaws in knowledge acquisition (see learning).
Knowledge
asymmetry
See asymmetry
(illusion of)
Knowledge
03/2i - 04/ 3i + see illusion, overconfidence
Kurtosis
02/7i,11i - 03/8i + see fat tail, distribution curve,

rare event, cluster, asymmetry)
What happened to the bell?

Kurtosis is a mathematical indicator that measures how much a statistical
distribution differs from a "normal" bell-shaped Gaussian curve.
It shows how dispersion of data from the mean is larger or shorter, flatter
or more peaking, regular or clustered, symmetric or skewed, compared to
that normal distribution.
It takes for example into account clusters (etymology: kurtosis = bulge) or
voids (scarcities of events) that might be present at "wrong places" (*) of
the curve when compared to the perfect bell outline that fits the normal
random law.
(*) For example in the centre or at the ends, or on a side or on the other
(asymmetries)
A glimpse at leptokurtosis, as an example

Leptokurtosis (see that word) is a higher than normal concentration of
data near the mean, combined with fat tails. A dissident camel showing a
very high, narrow and peaking bump in the middle and two small bumps at
each end.
Market price variations tend to be leptokurtotic. Most of the time the
volatility stays close to the average, and suddenly extremely strong rises or
falls happen.
La - Le

Lag, latency
02/5i + see hysteresis
Laziness
04/8i + See heuristic, default of attention, status quo

bias, (rational) ignorance
Laziness when making decisions (for example about investment), takes

usually the form of skirting the homework of digging deeper for
information and analysis.
Here are the possible consequences:
It can have some rationale in effort saving.
But it often leads to simplified heuristic and imitative or routine
behaviors, that causes wrong decisions.
Another form of laziness is under-trading / underreaction (see those words)
but, after all, overtrading might be even more damaging.
Lead & lag
02/5i + see hysteresis, rotation
Learning (social)
00/12i + see knowledge acquisition, imitation
Learning by walking in other people's steps

Some behaviors are considered as innate. But many others are learned
via social contacts and interactions, and chiefly through imitation (see
that word).
People learn some behaviors by themselves, via their own discoveries, but
they also learn many behaviors from one another, inside the social context
in which they live. "In Rome, do like the Romans do".
As a consequence, people might be "under influence" and not decide all
the time on their own free will or their independent analysis, even
when they think so.
Well, it is normal that society has its own rights, and one of them is to help
the individuals to learn proper behaviors. The problem starts if the
usefulness of those common / conventional ways of thinking and doing are
never questioned, even when they become oppressive or counterproductive.
But what about individual and autonomous learning?

On a more individual aspect, uncritical and overspecialized learning might
also create habits, illusions of knowledge and cultural biases that distort the
analysis of phenomena. Such narrow learning might be obsolete or
unsuited to different situations or to evolving situations.
Leptokurtic
distribution,
leptokurtosis
Li - Lo
07/4i + see fat tails, kurtosis

(financial)
Lifecycle
See time horizon, long bias, (narrow) framing,

rotation
Lifecycle is a concept applied in biology, and also in marketing and

innovation (product life cycle). Usually, innovation have to break through
some initial resistance (see status quo bias, percolation). If they succeed,
they develop very fast, then stabilize, then decline. Well, this is a bit
simplistic, other "curves" are possible.
In demographical economics, the concept means that preferences (for
example between savings, borrowing, consuming) and attitudes (risk
attitude...) evolve with the age of people, as their time horizon (see that
phrase) changes.
Applied to finance, this notion shows that often people start too late to
prepare for their old age financial situation (short term bias / narrow
framing), although the opposite attitude might exist too (long bias)
Liquidity
(Flight to)
Liquidity
(Il-)liquidity /
Liquidity crisis

Glossary
Liquidity
premium
Liquidity squeeze
Liquidity trap
Logical fallacy
Long bias,
longshot bias
04/8i + see fallacy, cognitive bias, manipulation

03/1d,10d,11i + see persistence, memory, time
horizon
The long bias is a preference for impressive performance in the long run,
without much attention to the short term prospects, at the difference of the
short term bias (see time horizon).
The longshot bias is a market anomaly / deviation that happens when
overpricing or underpricing goes on, or even increases, for months or years
due to positive feedback.
It is also a human behavior - as if people "never learn" or at least have a
short memory - to pursue a goal that can be considered already
overreached. It has thus a risk of backfiring,
Long tails
Loss averse,
aversion
See rare events, extreme

Lu - Ly

Luck puzzle
02/10d - 04/9i - 08/05i,06d + see survivor bias
Trying to explain why the winner won and dodged the

bullets.
The laws of probabilities allow for occasional long streaks of positive
outcomes. Randomness doesn't mean full regularity and alternation
That might explain why some market players (called "A players")
constantly win more than they lose. The puzzle is whether their
performance can be attributed to pure luck or to superior experience
and ability.
Actually, it happens often in the long run that things go
astray:
Players at ease with a kind of market
situation (bullish or bearish phases) don't adapt
well when the situation changes.
One of the effects of luck is the temptation to
go on betting on a recent favorable trend and to
raise the ante ...until losing.
People attribute to their own expertise a
series of gains they got by pure luck, and here
also go on betting imprudently.
Luckier or smarter?
The survivor bias (see that phrase) might explain why recurrent winners
are noticed and considered as experts. But they are usually the same *very
small* bunch of people who go on, decades after decades, winning and
accumulating fortunes. Therefore we cannot discard that this performance,
although some luck might be involved, is largely the result of their better
understanding of market forces and from some superior self-control.
The same goes for some categories of players (C players) who seem to be
born losers, as they repeat again and again the same failure behavior. That
makes their behavior, although not easy to spot, a good market indicator.
Lyapunov
exponent
01/10i + see memory
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The Lyapunov exponent measures small but continuous / cumulative

trajectory deviations in supposedly random time-series of events.
Those divergences indicate for example if those events are affected by long
memory.
See also Hurst coefficient.
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Behavioral finance glossary: letter M, peter greenfinch
Behavioral finance FAQ / Glossary (M)

A B
Ma
Full list

Magical thinking,
pi-Due to its length, this article is in a separate
images/
page
numbers
arrig.of this "M" section of the Glossary
images/
gif
piMania
(collective)
00/12i
+ see mass behavior, bubble
images/
arrig.
images/
gif
images/
pi-Manipulation,
page
manipulate
images/
arrig.
gif
pigif
00/12i
- 02/7i + see crowd, hysteria, mania, herding
Mass
behavior,
images/
arrig.
+ bfdef2
hysteria,
market
images/
gif
piMass media decline, but masses survive!
arrig.
There is a wrong impression that mass behavior is a thing of the past, as
gif
economic diversification increases behavior segmentation.
But mass power is still alive and kicking in many situations.
The same than global communication favors segmentation it favors also
cases when the whole mankind react more or less together.
Mass (definition): In social sciences, a mass is a large human population
segment. It sometimes represents the biggest share of the whole
population.
What forms human masses take?

Loose or organized?
Members of a mass are less physically connected than in crowds or
groups. But even so, they tend to have common beliefs, attitudes, behaviors.
A human mass, and the related attitude or behavior, takes the shape of:
pi-Either some temporary encounter, for example a common emotional
response
to some isolated event,
arrig.
gif
pi-Or a permanent, even structural, body (what is called a society...)
which
arrig. fits a complex combination of:
gif Hard criteria, such as factual socio-economics characteristics,
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Soft criteria, such as common beliefs and practices.
Examples
Mass medias, for example, are medias that target the majority of the
residents of a large area.
Although investors have different profiles (see that word) and investing
styles, they sometimes behave as a mass (see herding).
What are the (massive?) effects

Drowned in the mass!
The feeling of unity found in a mass might be good when it fosters a
smooth working of society, or helps to face some common challenge.
The drawback is that it can be at the expense of personal thinking freedom.
It becomes more worrying when the emotional force that spreads and
grows as a common feeling becomes excessive and irrational (hysterias).
pipi-Therefore, mass behavior might be biased and bring ...massive
mistakes
arrig.
arrig. (see crowd behavior).
gif
gif
Mathematical
images/
See decision making, model
psychology
images/
piMathematical psychology is a field of research that tries to quantify
arrig.
behavioral factors so as to build decision making models.
gif
Maximization (of
images/
01/7d,9i + see utility
utility,
images/of reward/
risk)
piarrig.
gif
Me
Mean-reversion /
images/
reverting
images/
piMean-variance
images/
arrig.
images/
gifMedia bias,
images/
pidistortion
images/
arrig.
pigif
arrig.
gif
02/8i,11i,12i + see reversion to the mean

02/5i + see risk, volatility
00/11i,12d - 01/3i + see information anomaly,
disinformation, manipulation
Just because it is in the news, is it true?

Media are here to inform, but they cannot be always fully reliable, for good
or bad reasons. Some information they give do not match realities and
therefore distort the truth.
Those screens and skews are more or less frequent and excessive,
depending on the "quality" of the media.
Why can media biases take place?

When ink hides truth.
Many distortions are unavoidable and accidental, but some others are
clearly akin to manipulation.
Therefore, information distortions done by media people occur:
pi-Either involuntarily:
arrig.by oversimplifications and errors - due to a lack of time or
gifeffort to check, or to an imprecise knowledge of the topic by the
author,
or because of habits, mimicry, and unconscious biases, etc.
pi-Or half consciously, because of blatant neglect in checking, and
lack
arrig.of professionalism in general,
gif
pi-Or plainly voluntarily (see manipulation, disinformation)
arrig.
gif
00/7d,8i,11i,12i - 05/2i - 07/6i + see common
knowledge, viral communication, diffusion,
Meme, memetics
images/
epidemics + bfdef2
images/
piWhat all of us know!
arrig.
gif
Definition: A meme:
pi-is a small "cultural object" (concept, image, song, habit, belief, story,
product,
arrig. buzzword or catch phrase, joke, slogan, name of a stock...)
gif
pi-which has been diffused by replication from one person to another,
and
become widely known and used in a society.
arrig.
That
gifcommon bit of knowledge self-replicates just like a gene (thus the
semantic similarity) or virus (see viral communication).
In finance, the P/E example can be given (see the "common knowledge"
article).
00/6i,7i,8i - 01/10i,11- 03/12d - 08/10d + see

Lyapunov exponent, H / Hurst coefficient,
persistence, longshot bias, anchoring, recency bias,
small numbers, time + bfdef2
Memory (short,
images/
long)
images/
piarrig.
It was such a long time ago, I nearly forgot it...
gif
OK, but be wary of recent events, they might not give the whole picture!
The short memory, which is focused on recent events, usually plays a

stronger role in decision making than the long memory: remembrance of
events that took place a long time ago, even important ones.
This is often called the recency effect / recency bias (see that phrase).
The Hurst coefficient (see that phrase) is a tool to measure the long
memory / trend persistence effect
Social memory and market memory

Money loss and memory loss
It seems that in economic and social behaviors, the recency effect is
stronger than the long memory. According to some studies (Bob
Bronson), memory is subject to an exponential decay process.
Long memory, after a while, does not operate any more,
pi-as people tend to forget previous trends or events
arrig.
pi-as they bring some distortion in what they remember,
sometimes
recording the contrary to what they so or
gif
arrig.
heard
gif !
pi-also as new generations, which did not experience them,
arrive
arrig. on the playground.
gif
The collective loss of long memory can have dramatic effects, it might
explains why some errors are repeated generations after generations
(futile wars, deep economic crises...)
In financial markets, it explains why some excesses (bubbles, crashes...)
can be repetitive in long intervals.
pi-Investors, although anchored on past event (see anchoring) start to
forget
arrig. or ignore many of them after a while.
gif
pi-Also, they are more interested in short statistics (see "small number")
than
arrig.on long ones that might show better the probability of rare events.
gif
Additional
factors are the salience and time duration of the original event
and the strength of the information about it (Michel Wannke).
pipi-People who saw the Moon landing on the TV remember it better than
what
they have eaten at lunch on the same day.
arrig.
arrig.
gif
gif
Mental accounts /
images/
accounting
/
images/
compartments
piarrig.
gif
Mi

page
gif
Microeconomics
images/
00/8i
paradoxes
images/
+ see game theory, decision paradoxes +
(St
pi- Petersburg,
probabilities site link
Allais...)
arrig.
gif
03/10i + see herd instinct, imitation, peer pressure,
Mimicry
images/
imitation, conformity + bfdef2
images/
piAs long as my neighbor did it, why not me?
arrig.
gif
Definition: mimicry is the tendency of people to imitate others (be they
gurus, crowds, or close neighbors),
pi-Either in their beliefs,
arrig.
pi-And/or in their attitudes,
gif
arrig.
pi-And/or in their actions.
gif
arrig.
From mimicry to herding: the stock market case
gif
When most members of a group mimic one another, we have what is called
herd instinct / herding (see those word), a classical behavioral finance
notion.
People tend to get an impression of safety by doing the same thing than
other people.
For example, in stockmarkets, it happens rather often that all the most
active investors want to buy the same stock, or to get rid of it, at the same
moment.
What consequences?
Trapped in the crowd or adapted to it?
Mimicry is sometimes a maladapted instinct, a Pavlovian reflex which
serves no real purpose.
But in other circumstances it can be a rational adaptation behavior ("do in
Rome like the Romans do").
Aristotle defined human as "social animals". Luckily, it is only
partially true, as it would be frightening to have only sheep or wolves.
Well, he seems to have been not too good at subtle thinking, he was
seeing the world only in white / black, true / false. Not the guy for
"fuzzy logic" (see that word, also used in Behavioral finance).
Mindshare
01/1d + availability heuristic, reputation
images/
images/
Definition: mindshare is a measure of the attention that a population
pidevotes to something.
arrig.
An example is the percentage of people in a population that have
gif
memorized a brand, a firm's name.
This measurement is thus linked to notoriety, fame, perception, image.
Obviously, customers and investors tend to neglect obscure companies
and to be interested in the best known ones (see availability heuristic)
00/5d,6i,8i - 01/4i,7i + see mispricing, anomalies,

(price)
images/
price anomaly, behavioral biases, value, overpricing,
Misalignment
images/
underpricing + bfdef3
piarrig. Wrong side of the road?
gif
Definition: a stock price misalignment (or mispricing) is a market anomaly
in the form of a deviation between:
pi-The real stock price
arrig.
pi-And the so-called stock's "intrinsic value", as calculated with
models
gif
arrig. that use present fundamentals and projected returns and risks
data
gif (see "value", "fundamental"....).
In other words, that stock appears then underpriced or overpriced
compared with those prospects.
The price alignment concept is also used in other markets (currency
prices...)
Are those misalignments sizable and frequent?

Of course, some "misalignments" might be only apparent and come from
miscalculation, as there is some subjectivity in such calculations,
The conventional theory (see EMH) says that such discrepancies are
speedily corrected.
But in practice, they seem often to persist for a long time, or even
amplify. We see it when a trend accelerate or reverse without clear new
information.
Misperception
images/
images/
piarrig.
See perception, misrepresentation
gif
A misperception is a belief or conclusion that is contrary to real facts. See
for example "base rate fallacy".
It can be due to a wrong information but also to a misunderstanding by the
receiver of the information
Mispricing
images/
images/
piMisreaction (to
images/
arrig.
info)
images/
gif
pi(1666&
Misrepresentation
images/
arrig.
octets)
images/
gif
piarrig.
gif Mo - Mon
See misalignment, anomalies, price anomaly,

behavioral biases, value, overpricing, underpricing +
bfdef3
01/6i + see over / under-reaction, information +
bfdef3
See representation, disinformation

Mob psychology
See crowd behavior
images/
images/
(trading, pricing,
images/
piinvestment...)
Model, piimages/
arrig.
page
Modeling
pigif
gif
arrig.
Mojo
00/12d
images/
gif
images/
Momentum
images/
pi00/8i - 01/1i,3i,4i - 02/5i,8i,10i,11i - 03/1i,5i,6i Momentum
images/
images/
arrig.
04/2i + see cycles, trend following, overreaction +
investing
/ trader /
piimages/
gif
bfdef3
trading
arrig.
pigif
arrig.
Following the fastest horse.
gif
To the pasture or to the cliff?
Definition (momentum): in an asset market, a price momentum is the
direction and speed of an upward or downward price trend (see trend)
Definition (momentum trading): momentum trading is the basis of the
"trend following" (see that phrase) strategy in asset markets: buying what
goes up, selling what goes down.
It is rather commonly used in short or medium term money management.
Momentum traders play asset in which a strong price momentum has
started and lasted for a long enough number of months. Typically, they
would preferably buy stocks that had the highest return in the previous
years and / or sell those with negative returns.
Is it a bias?
Riding the horse until jumping off
This "follower" strategic thinking is a mental bias in some degree, linked
to short memory and rational expectations.
On the other hand, trend spotting might sometimes offer opportunities. It
seems that a trend that had an optimum time and strength to settle (some
will wait for at least one year and a 20% rise) has an above average
chance to self replicate in the next period (another year).
pipi-This can be linked to underreaction followed by adjustment
overreaction,
as a social learning curve. (see trend)
arrig.
arrig.
gif
gifBut to follow that strategy too long, let us say over three year, might
pipibe
looking for trouble, ask any contrarian (see that word).
arrig.
arrig.
gif
gifThe momentum might break without warning
The opposite bias is "gambler's fallacy" (the belief that there will be
automatically a reaction in the other direction).
Money attitude
07/7i + see psychology of money
images/
images/
Money illusion /
00/6i,12i - 01/7d - 02/11i - 06/2i - 07/7i + see
images/
pimonetary
illusion
mental account
images/
arrig.
pigif
The shrinking banknote.
arrig.
gif
Definition: Money illusion is the confusion between "nominal" and
"real" values (also called "deflated" or "inflation corrected "values).
It happens when people overlook, in their decisions, elements such as price
inflation, or cost comparisons, or (rate of) return benchmarks, between
two periods or two kind of operations.
It is a kind of "framing" (see that word) that may give the illusion of
getting richer or poorer. For example:
pi-Salaried people might not perceive that more money available
might
arrig. mean inflation, which might lower their real wage.
gifThey might start working more at some better nominal wage,
although it is really less in real terms than they were normally
willing to work for (wage stickiness).
pi-Investors, may have, because of that illusion (which can be
compounded
by the "attribution bias", see that phrase), a problem of
arrig.
discerning:
gif
- What is due to their stock-picking talent
- What comes from general market moves. Boy, my stock goes up
10%, and I am elated, even though the market index went up 15%.
Moo - My

(investor /
See (general, social) mood, (market / investor)
images/
market)
sentiment, consensus
images/ Mood
pi(general / social)
images/
arrig.
Mood
page
images/
gif
gif
pipi-Due to their length, those articles are in a
arrig.
Moral
images/
separate
page of this "M" section of the Glossary
arrig.
gif
Moral
hazard
images/
images/
gif
piMoral
hypocrisy
images/
images/
arrig.
piimages/
gif
arrig.
Motivation,
See behavior, cognition, emotion
piimages/
gif
Motive
arrig.
images/
gif
piMotivations are what cause behavior. Except in fully automatic
arrig.
unconscious behaviors (see automaticity, habit...)
gif
Motivations can come from the intellect (cognition) or from emotions.
Emotions are the main factor that make people act, but they can override
cognition with the risk of irrational decisions.
(investor)
See (investor / trader) psychology
images/
Motivation
images/
pi-(mental) Myopia
See anchoring, recency bias, saliency, heuristic,
images/
arrig.
tunnel vision, framing
images/
gif
piMental myopia is a kind of anchoring on the most immediate or visible
arrig.
events, or on one's ingrained beliefs.
gif
Framing, recency bias, mental accounting, etc. (see those words) are
examples
Mysticism,
images/
mystical,
page
images/ mystique
pigif
arrig.
gif
"search archives".

polls
pi-separ.gif
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Home / accueil
pi-Disclaimer /Avertissement lgal pi.

arrig.
arlef.
gif
gif
(1623
octets)
Behavioral finance glossary: N-0, peter greenfinch
Behavioral finance FAQ / Glossary (N-O)

A B
Na - Ne
Full list

pi-Narcissism,
narcissist
arrig.
gif
pi-Narrative,
narration
arrig.
gif
pi-pi-Due to its length, this article is in a separate

page
of this "N-O" section of the Glossary
arrig.
arrig.
gifgif
See numeracy bias
See anchoring, framing, selective exposure, tunnel

pi-Narrow thinking
vision, availability heuristics, reductionism
arrig.
gif The human brain is rarely trained to rotate like a ship radar.
Definition: Narrow thinking (or selective thinking / selection bias) is
focusing the mind on only one element of the issue.
pipi-See the "selectivity bias" table.
arrig.
arrig.
An
gif
gif omnipresent phenomenon
Every brain carries a form of the virus
This overly selective mental bias is very common.
It is due either to cognitive defects (in attention, memory, logic) and/or to
emotional influence (attractions, aversions).
It takes many forms, such as anchoring, framing, selective exposure,
tunnel vision, availability heuristics, reductionism, numeracy bias, denial
of realities, cognitive dissonance..., each one with its article in this
glossary, and some which are not studied here (rigid principles, dogmas,
tenets, fanaticism...).
It might even be a paradigm

The binary / formal / Aristotelian logic, is praised as the epitome of
rationality, and is obviously useful in some reasoning when things are clear
cut. But it can also contribute, as any dogma, to the narrow thinking bias in
the quite frequent cases that are evolving and many-sided, as the "fuzzy
logic" article explains.
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pi-(human) Needs
arrig.
gif
pi-Neighborhood
effect
arrig.
gif
pi-Neural /
neuronal
nets
arrig.
gif
pi-Neurolinguistic,
Neuroarrig.
semantics
gif

page
arrig.
arrig.
gifgif
01/1i + see home bias, familiarity, availability
heuristic
pi-pi-Due to their lengths, those articles are in a

separate
arrig.
arrig. page
gifgif of this "N-O" section of the Glossary
piNeuroeconomics,
arrig.
Neurofinance
gif
piNeuropsychology
arrig.
gif
pi-Neuroscience
arrig.
Neutral market,
gif
piSee trend, volatility
Neutral
arrig. trend
gif
Asleep? Or just waiting?
Definition: a neutral market / neutral trend refers to a market period in
which there is no clear price trend (uptrend or downtrend)
In such a situation, how investors might react ? Here are some hints:
pi-Most traders (option traders, swing traders) would play only on
volatility
(or on changes in volatility).
arrig.
gif
pi-Some value investors and contrarians might start to buy (see
"accumulation")
if prices are low (after a crash for example), or to sell if
arrig.
prices
gif are puffed up (end of a bubble).
pi-(effect of /
reaction
arrig. to) News
gif
No
03/04i + see information

pi-Noise trader /
Noise
arrig. trading
gif

page
arrig.
arrig.
gifgif of this "N-O" section of the Glossary
Non-independence (in decision distributions) see independence

images/
piNon-linearity,
arrig.
images/
nonlinear
gif
images/ effect /
separate
arrig.
arrig. page
system
pigifgif of this "N-O" section of the Glossary
arrig.
Non-stationary
images/
gif
images/
piNorms (social)
01/1i + see groupthink, social learning
piarrig.
arrig.
gif
gif
See image types + anchoring, underreaction
Nostalgia stocks
images/
images/
Ex-movie stars
piarrig.
Nostalgia stocks are stocks of companies that:
gif
pi-Had their moment of glory,
arrig.
pi-Have been losing, for whom take a rational approach, most of their
attractiveness
since then,
gif
arrig.
gif
pi-But are still rather overpriced in comparison with their prospects,
because
arrig. of their ex-fans' mental anchoring.
Of gif
course, stocks which were popular and are now underpriced, taking into
account for example, after a serious analysis, that an earnings recovery is
really in sight, would better be classified in the "value stock" category.
Nu

pi-Numeracy bias
arrig.
gif
pi-Numerology
arrig.
gif

page
arrig.
arrig.
gifgif
03/1i,2i,11i + see magical thinking / numbers, small
numbers, numeracy bias
Number superstition
As financial matters rest on numbers, there is a tendency by some quasiesoteric "believers" to:
pi-Give magical attributes to some salient numbers.
Some examples are: Fibonacci "golden" number, round numbers,
arrig.
gifpast statistics, narrow "economic" indicators", even those
covering too short periods.
pi-Base their investment decisions on such flimsy signals, although
they
arrig.have no relation with the fundamentals or the state of the market.
gifOf course, when many people follow those indicators, self fulfilling
prophecy might take place, but this is far from being always the
case.

Obedience to
images/
00/8i,12i - 01/10i + see guru
"experts"
piarrig.
Those men in white.
gif
People tend to be intimidated by others who are considered as experts. In
that case, might they follow their recommendations more or less blindly.
That kind of obedience / submission can reach exaggerated levels with
tragic consequences. This has been shown for example in the "Milgram
experiment", although in that case it was combined with obedience to
authority.
Financial examples
Some financial market commentators or analysts reach a guru status.
People don't question those pundits' apparent wisdom. The "followers" /
"believers" can in extreme cases become the victims of manipulations by
some of those experts who know the clout and domination they have on
them.
Also, experts themselves can be influenced by "peer pressure", due to
colleague analysts or fund managers to take examples in the financial field.
As a result they might under-perform the market.
pipi-Some studies have shown that picking stocks at random might get
better
arrig.
arrig.results that those obtained by the average professional. Please,
don't
gif
gif tell it ;-)
Observer bias
See reflexivity
images/
piSometimes the observer changes the phenomenon it observes. See
arrig.
reflexivity, self-fulfilling prophecy, self-deluding prophecy...
gif
For example, the economic behaviors of people can be influenced by the
economic situation, in a direction that maintains or reverts that situation.
Ophelimity
01/4d - 04/8i + see preferences, utility, need
images/
piarrig. When the world moves, desire is in the driver seat.
gif
Ophelimity is a concept by Pareto that could be simplified in "economic
desirability" or "economic satisfaction".
Ophelimity might be considered as a less rational form of need,
preference or utility. It might also be taken as a more neutral / politically
correct equivalent of utility which has a moralist undertone.
In the strict rational sense, some goods, assets or investments may prove of
little use, useless, or even damaging. But as some or many people desire
them, they can still be considered as a need and have a market value.
Examples in business
Narcotics or compulsive gambling, and whatever other activities of the
"vice" economy are well known. On a much less dramatic scale, the simple
gadgets or trinkets devised for marketing also.
Examples in financial markets

The value of some precious assets such as gold for example, which has
only limited consumer or industrial interest (*), or of collectibles, can be
linked to their ophelimity compounded by their rarity. This makes it
difficult to calculate their "fundamental" value.
(*) Although in exceptional periods of financial / monetary turmoil another
interest might surface: some investors might consider it safer than other
assets, even than cash.
Optimism /
images/
optimistic
bias,
pioveroptimism
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gif
Ostrich effect
images/
images/
piarrig.

page
arrig.
arrig.
gifgif
See cognitive dissonance, narrow thinking
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Overconfidence,
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overconfident
images/
piOverconfidence in
images/
arrig.
regulations
images/
gif
piarrig.
pi-Overleverage
gif
arrig.
pi-Overpricing /
gif
underpricing
arrig.
gif
pi-Overreaction /
underreaction
arrig.
gif
pi-Overtrade,
overtrading
arrig.
gif
piOversimplification
arrig.
pi-pi-Due to their length, those articles are in a

separate
arrig.
arrig. page
gifgifof this "N-O" section of the Glossary

separate
arrig.
arrig. page
gifgifof this "N-O" section of the Glossary
gif
"search archives".
polls
pi-separ.gif
GALLERY
Home / accueil

arrig.
arlef.
gif
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Behavioral finance glossary: P-Q, peter greenfinch
Behavioral finance FAQ / Glossary (P-Q)

A B C D E F G-H
Pa-Pb
V-Z
Full list

See emotion, neuroscience, greed and fear, loss aversion

pi-Pain (and pleasure)
arrig.
Driven by pain or pleasure, and sometimes by reason.
gif
Pain and pleasure are basic types of feelings which are at the source of most emotions (see emotion).
As neuroscience research found, the brain areas and some secretions related to pain or pleasure play a part in human mental processes, in decision making and in behaviors.
pi-pi-They tend - notably when risks are at stake (as is the case for example in economics and finance) - to override brain sectors related to cognition and rational thinking.
arrig.
arrig.
Money,
and pain / pleasure
gif
gif
Pleasure seeking and pain avoiding is expressed in investment by "greed and fear", and in social emotions leading to mimicry and herding.
A typical example in which pain avoiding leads to irrationality in investment is "loss aversion".
A more mundane example is that some people find it painful to spend and others painful to save.
To train mentally to some indifference to pain and pleasure (and as a result to greed and fear) seems to help to make dispassionate money decisions and to keep some discipline (see that word)
00/12i + see bubble, crash, mass behavior, hysteria, capitulation
pi-Panic
arrig.
In case of panic, the feet take hold of the brain
gif
Definition: a panic attack is a sudden and extreme fear which blocks the rational analysis of a situation.
It can make either somebody (individual panic) or a group of people (collective panic) react in an inappropriate ways.
It either paralyses actions (see paralysis),
Or it makes run away from the perceived danger,
Or it leads to extreme actions.
Market panics
Rushing to the market exit ...or entrance.
Collective panics occur sometimes in stockmarkets (*), when a huge wave of people buy or sell suddenly (**).
pi-Crashes happen when the whole investor crowd runs for the exit, to the point of clogging that exit by creating illiquidity (lack of counterparties).
They differ from a mere bear market (although they sometimes signal the start or the end of such a downtrend, see capitulation): in a crash the price fall is more sudden and dramatic.
arrig.
gifSome bubbles could also be labeled "buying panics". Here also it is more intense than a simple bull market (although it can be its last phase).
piThis occurs when a rush of investors into the stockmarket signals a flight from liquid assets (fear of monetary bankruptcy) or from other assets considered dangerous or unattractive.
arrig.
gifIlliquidity can strike also specific "cornered", or just fashionable, stocks, when "too much money chase too few assets".
(*) Collective panics can take place in other asset markets, and also in goods and services markets (fear of scarcity...). It can also strike other financial institutions. This is the case of bank runs
(long queues to withdraw money from a bank considered dangerous ...which accelerates its demise).
(**) Well, except when all the brokers' communication lines are saturated or when nobody offers a counterpart.
pi-Paradigm
00/8i,11i,12i - 03/10i + see common convention, memes, percolation, heuristic
file:///C|/Documents%20and%20Settings/desib/My%20Documents/Vocabulary%20May%202...Finance%20Terms/Behavioral%20finance%20glossary%20P-Q,%20peter%20greenfinch.htm (1 of 8)11/11/2008 15:09:13
arrig.
Scientific Credo?
gif
Definition: a paradigm is a largely accepted theory / model that has been built to understand and deal with a category of phenomena in a given branch of knowledge or activity.
As it is normally more elaborate and more widely used than a simple heuristic.
The word is often as a shortcut to call the "standard" paradigm / mainstream theory in a given field. It is the "pop theory" that is widely used in a specific epoch in most models and methods
that are built in that field to understand / interpret situations and to make decisions.
Are paradigms usually sustainable?

Eternal truth?
Standard paradigms usually:
pi-Hold for a rather long time, as humans are beings of anchoring, habits and commitment.
They have difficulty in accepting new ideas, the old ones are so sticky.
arrig.
gif
Tend
after a while to "overreach" themselves by trying to explain more and more phenomena, even outside their original field (halo effect).
piBut are not eternal as after a few decades they are often replaced, or at least completed, by a new one (paradigm shift).
arrig.
pigif
arrig.
gif
Poor versions of paradigms
A paradigm about paradigms is that a paradigm can make you lazy.

Paradigms, however elegant, useful and time-saving they usually are, can also, if used lazily and without asking questions and taking some precautions, lead to dogmas, common thinking / belief
and simplified generalizations and heuristics (see that word).
Often, people not only do not understand fully what the paradigms are about, but also forget to dig deeper whether they are relevant or not to the situation. To guide their decisions, they often
follow and use paradigms mechanically in their simplest and narrowest form. Such crude, reductive, impoverished and caricatured forms have become common heuristics but with a bit more
science in them.
Two common examples in economics are "Keynesianism", or "supply side economics", that have become buzzwords that give an oversimplified idea of two theories that are quite complex, that
interpret them in the crudest way and that consider them as panaceas against any economic ills.
pi-(decision) Paradoxes
arrig.
Paralysis
images/
gif
images/
Passive investing / management
pipiarrig.
arrig.
PBR (P/B) effect
pigif
gif
arrig.
gif
See microeconomics paradoxes, game theory + probabilities link

See hysteresis, delaying tactics, status quo bias
See active / passive investing
See PER effect, size effect
Jewels in the company vault? Revealed in the books?

Definition: The PBR or P/B of a stock is an acronym or its price to book ratio.
PBR = Market Price / net assets per share.
In other words it measures how much the market pays for those assets.
The PBR "effect"

When prices climb on the book.
Although it is not the main criterion, it seems to play a part in stock prices. It can make them rise above the values calculated when taking into account only earnings or
dividend prospects. As if investors were interested not only in the business future, but also in the treasures in the company's vault.
This does not fit the standard theory. Investing on the basis of the P/B goes against the "efficient" evaluation paradigm for which prices just depend of future returns and risks.
pi-It is therefore called an "effect", a word sometimes used as an understatement for "price or return anomaly".
The PBR effect is usually listed in the same category of "anomalous" pricing parameters than the "PER (P/E) effect" or the "size effect".
arrig.
gif
Is this effect rational?

Investing on the basis of the P/B goes against the "efficient" evaluation paradigm for which prices just depend of future returns and risks.
But the P/B effect is not completely irrational, as:
pi-A firm with plenty of marketable assets can recover money in case of problem by selling some of them ("family jewels").
Takeover bids, that would boost the stock price, can be motivated by the value of those existing salable assets.
arrig.
pigifSometimes the true value can lie in "hidden jewels" not accounted for in the books.
arrig.
gif
Pe - Per
pi-Peer influence / pressure / conformity
arrig.
pigifP/E (PER) effect
arrig.
pi-Perceived risk, risk perception
gif
arrig.
pi-Perception
gif
arrig.
gif
Percolate, Percolating, percolation threshold
piarrig.
gifPersistence (in fractals / trends / biases /
pivolatility)
arrig.
gif

pi-Due to its length, this article is in a separate page of the "P-Q" section of this Glossary
arrig.
pigifDue to its length, this article is in a separate page of the "P-Q" section of this Glossary
arrig.
pigifDue to their lengths, those articles are in a
arrig.
separate
page of the "PQ" section of the Glossary
gif
arrig.
gif
00/6d - 01/3i,8i,10i,11i - 03/10i + see Hurst coefficient, Lyapunov exponent, trend, diffusion, percolation, longshot bias,
long memory
Usually (see diffusion, percolation) any dynamic phenomenon (growth or decline for example):
pi-Has a good chance to persist, or even to snowball, once it goes above a critical point / threshold (for example a number of buyers for a new product).
arrig.
pi-If it stays under that point, it is not certain to persist. It can even abort and disappear completely (anti-persistence, negative persistence).
arrig.
Thegif
Hurst coefficient helps to measure persistence in a series of historical data.
gif
Trend persistence in asset markets
As concern stockmarket trends, they can, after a given period (for example one year), be considered as having "settled in". In other words a long established trend seems to
have a higher probability, in the next period, to persist than to revert. The delayed reversion will happen only when it reaches the next critical point.
Between take off and landing, market trends are often on autopilot.
Also, usually, upwards trends seem to persist longer than downward trends.
pi-(money, investment) Personality

arrig.
Know thyself!
gif
03/9d + see psychology, style, profiling + eprofile
Various works (psychographic) by psychologists have tried to classify money personalities according to various traits, such as
Their preference between spending and saving, often linked to their time horizon (see that phrase),
Their risk profile (degree of aversion to risk),
Their ethical preferences,
Etc. (see "style" for more details).
To spot those traits could help:
pi-In individual behavior counseling, including financial strategy counseling. Or at least to self-analyze and understand one's own practices.
As marketing segmentation tools for banks and money managing firm
arrig.
pigif
arrig.
pi-To understand better the effects of the various classes of investors on financial markets, in order for example to build "agent-based" (see that phrase) investment models.
gif
arrig.
04/6i,7i + see incentive, unintended consequence, moral hazard, public choice bias, incentive, public choice, agentPerverse
effect, incentive
pigif
principal
arrig.
gif
Definition: a perverse effect of some decision or action, is an unintended consequence (see that word) and counterproductive behaviors that are the opposite of what was
intended, and that in some cases could be definitively disastrous.
Specific cases are related to perverse incentives (see details in the related glossary article), with three main economic examples:
pi-Some taxes, subsidies or regulations can be self-defeating,
Or some management objectives or benchmarks (and the related bonuses offered to reach them), can lead to neglect all other goals. For example:
arrig.
pigif
arrig.In corporate management, to ignore long term ones if those incentives privilege short term results that are more easy to measure ...or to manipulate.
gif In investing to be happy to beat a stock market benchmark by losing less than the index (relative performance instead of absolute performance).
Pes - Pri

00/8i + see rare events + probabilities

pi-Peso problem anomaly
arrig.
The peso problem refers to a market anomaly, for example a sudden price fall, that is infrequent (rare event, fat tails, extreme occurrence) but that leads to extreme
gif
consequences that can be disastrous.
pi-Phase transition
arrig.
(market) Play, Player, Playing
pigif
arrig.
Pleasure (and pain)
pigif
arrig.
(market) Positioning
pigif
arrig.
Power law
pigif
arrig.
Precision bias
images/
gif
images/
(economic) Preferences interactions, reversal,
images/
pi(in)transitivity
images/
arrig.
pigif(equity, risk) Premium
images/
arrig.
images/
gif(psychological) Pressure
pipiarrig.
arrig.
gif
gif
pi-(bid, psychological) Price
(fair) Price
arrig.
pigif
arrig.
pi-Price anomaly
gif
arrig.
pi-Price information
gif
(Asset) pricing
arrig.
pigif
arrig.
Price-earnings ratio, price to book ratio
pigif
arrig.
Pride
pigif
arrig.
Too proud to change
gif
04/1i + see percolation

See game playing, game theory, agent-based model,
See pain and pleasure
See profile
03/4i + see distribution
See range estimate aversion
arrig.
gif risk premium
See
See conformity, peer influence, groupthink, herding, mania, hysteria
pi-Due to their lengths, those articles are in a separate page of the "P-Q" section of this Glossary
arrig.
gif
See P/E effect, P/B effect

See self esteem, commitment, rationalization, attribution, status quo bias, narcissism
Pride is not a bias in itself. But it can become one when it leads to a primacy of the ego, which overrides a sound appreciation of situations. It is one of the main causes of
stubbornness, for example in corporate management or in investment to go on with a losing strategy (see loss aversion).
Many investors stick stubbornly to their initial decisions and commitments (see that word) and usually try to find rational reasons and attributions to justify this, even if
ulterior facts and events show that they are wrong.
Pride accelerators
Extreme forms of pride happen when that feeling is combined:
pi-With overconfidence, arrogance and presumption and it becomes hubris and narcissism,
arrig.
pi-Or with an inferiority complex,
gif
It translates into a form of frustration or envy that makes the person try to take inconsiderate risk or create huge damage to prove that it is not an underling.
arrig.
gif cases seem to be frequent among power people, which can explain strange decisions by business and political leaders. It seems for example one of the motivation
Those
behind many mergers and acquisitions, which can explain why a good proportion of them are counterproductive.
See anchoring, (availability) heuristic

pi-Primacy / priming effect
arrig.
Remember it, my boy, you will not give again a good first impression.
gif
The primacy / priming effect relates to the first idea, fact, perception or representation that comes to mind about an issue, an event or an information.
It can instantly and unconsciously become a cognitive or affective anchor that excludes other references when dealing with the issue
pi-Principal- agent theory
arrig.
gif
Pro
02/,8i ,11i + see agent, ethical, perverse incentive, moral hazard

pi-Probability / Probabilities (objective,

subjective,
conditional)
arrig.
arrig.
gif
gif status quo bias, delaying tactic, underreaction
Procrastination
See
images/
images/
Profile / Profiling 1 (stock types)
pipipi-Due to their lengths, those article are in a separate page of the "P-Q" section of this Glossary
Profile / Profiling 2 (investors types)
arrig.
piarrig.
arrig.
gif
arrig.
gif
gif attribution
Projection
bias
See
pigif
arrig.
Definition: In psychology, the projection bias, something related to the attribution bias, is the illusion we might have that other people think - and thus will act or react - the
gif
same way than we do.
It is also called the false consensus bias, the idea that everybody see things like we do.
This self-centered bias consists also in attributing to others our own motivations, including ...our unconscious biases
Propaganda
00/12i + see disinformation, manipulation
images/
images/
images/
pi-Prospect theory
arrig.
images/
arrig.
between risk aversion, prospect theory, loss aversion, regret aversion, disposition effect...
gif
pipi-pi-See also the general "aversion" article to see the relations
gif
arrig.
arrig.
arrig.
Prototype
See profiling, type
images/
gif
gif
gif
images/
A prototype is a typical / perfect example of a given category (of stocks, of investors, for example...) that exists, or that is in the making and could exist in the future.
piPrototype is often used to describe a new phenomenon or design while archetype refers to old examples, real or invented.
arrig.
Both are found in finance: old categorizations as well as new paradigms.
gif
The risk is to go from archetype and prototype to stereotype (abusive categorization): see that word.
Proximity bias
images/
images/
piarrig.
gif
See home bias
Ps - Py
Pseudo-certainty, pseudo-instinct
images/
images/

See belief
piA psychological certainty that is not based on a conscious rational approach, which can be a brilliant intuition but has some chance of being an illusion (see that word).
arrig.
gif
Psychology (of investing, markets, money...)
images/
arrig.
images/
(economic, financial) Psychology
images/
gif
piimages/
Psychosociology / Psycho-sociology
See social psychology
images/
arrig.
piimages/
gif
arrig.
Public behavioral finance / economics
See behavioral public economics / finance, public choice, agent-principal
images/
pigif
images/
arrig.
Public choice / public policy bias
04/9i - 05/1i + see incentives, behavioral public economics / finance, agent-principal, social mood
images/
pigif
images/
arrig.
(1666 Caveat voters!
pigif
octets)
arrig.
Public choice encompasses decisions made either by voters or in the name of voters (= by public administrations), specifically in economic matters.
gif
Those collective decisions are often proposed or considered as an antidote to some misallocations due to market anomalies. But they have their own biases. They can create
their own direct anomalies, hurdles and failures or indirect disincentives.
One trait is the "majority cycle" (or voter pendulum).
It can bring extreme effects in one direction or the other, causing legal and social instabilities, something akin to excessive volatility. Of course, political
coalitions that tries to represent a larger share of the population than just one side or the other, can be instable also, but become necessary when everything else
failed.
Another aspect is optimistic / pessimistic "waves" in social mood.
We can label "behavioral public choice" the subfield of behavioral economics dealing with those phenomena.
Even if public schemes have their deficiencies, some BE/BF specialists propose "libertarian paternalism" to avoid some biased financial decisions, for example about investing
for retirement, if they are totally left to the individuals.
Pump and dump

03/7i + 06i + see deception, manipulation, ethics
images/
images/
Pump and dump is a form of manipulation of information about a stock.
piarrig.
pi-The manipulators create a spin (pump) around the stock (often a "penny stock") of a company which usually is a dead horse and in which they have or took a vested
gif interest.
arrig.
gif
pi-Then they sell them (dump) at a good price, thanks to the buying frenzy due to the hype.
arrig.
That
scam might be launched via traditional media, via newsletters, via internet spam, via advisers, via word of mouth (see viral communication)...
gif also take place through recommendations from some some sell-side analysts whose bank has at the same times corporate financing activities for the company that
It might
issued the stock. In other words, in that last case, the celebrated "China wall" between both activities has a hole.
Pyramidal scheme
images/
images/
piarrig.
gif
See greater fool delusion
Suckers at ground level, crooks at the top.

A pyramidal scheme / Ponzi's scheme is a form of "make money fast" scam built as an intentional bubble-like phenomenon.
It uses the mechanics of attracting an ever increasing number of new entrants into subscribing or buying a financial asset, with the promise of spectacular incomes or
gains.
pi-pi-Actually, a portion of the fresh money they bring will pay the revenues and withdrawal of the previous "investors", and the rest is siphoned into the scammers' pockets.
It gives
the illusion of working beautifully, making a lot of money for the investors ... until the scheme collapse when there are not enough new sheep to flee and all those who
arrig.
arrig.
getgif
stuck
gif in the trap lose the money they put in the hands of the scammers.

See quantitative analysis

pi-QA
arrig.
Quality premium
04/4i
pigif
arrig.
pi-Quant
gif
pi-Due to their lengths, those articles are in a separate page
arrig.
pi-Quant fund
arrig.
of the "P-Q" section of this Glossary
gif
arrig.
pi-Quantitative analysis / QA
gif
gif
Quantitative behavioral finance
arrig.
pigif
arrig.
pi-Quantitative investment
gif
arrig.
pi-Quantum lump, jump
gif
arrig.
gif (*) To find those messages: reach that Behavioral-Finance group and, once you are there, 1) click "messages", 2) enter your query in "search archives".
pi-separ.gif
Home / accueil

arrig.
arlef.
gif
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Behavioral finance glossary: letter R, peter greenfinch
Behavioral finance FAQ / Glossary (R)

A B C D E F G-H
Ra
V-Z
Full list

Random, randomness
images/
images/
piRandom walk hypothesis / RWH
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arrig.
images/
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piRange estimate aversion
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arrig.
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pi(risk of) Rare events
images/
arrig.
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pipi-(Ir-) Rational, (Ir-) Rationality
arrig.
arrig.
Rational bubble, expectations, bias
pigif
gif
arrig.
pi-Rational choice theory
gif
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pi-(bounded) Rationality
arrig.
pi-(near) Rationality
gif
arrig.
See distribution, random walk
gif
pi-Rationalization, rationalize
arrig.
gif
pi-Due to its length, this article is in a separate page of the "R" section of the Glossary
arrig.
gif
Rea
Reaction / reactions
images/
to info, news, events, signals
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piarrig.
Real estate market
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gif
anomalies / herding / boom
images/
piarrig.
gif
arrig.
gif
arrig.
gif
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gif
pi-Due to their lengths, those articles are in a
arrig.
separate page of the "R" section of the Glossary
gif
pi-Due to their lengths, those articles are in

arrig.
a separate page of the "R" section of the Glossary
gif

arrig.
gif
05/06 08/1i + see bubble / crash
file:///C|/Documents%20and%20Settings/desib/My%20Documents/Vocabulary%20May%202...%20Terms/Behavioral%20finance%20glossary%20letter%20R,%20peter%20greenfinch.htm (1 of 6)11/11/2008 15:09:15
Location, location, location, but mood also!
Some market traits

The real estate market is more heterogeneous (locations...) and its saleable assets are more individualized (look, comfort...) than publicly traded assets, although real estate
funds exist in many country.
Also, the affect of the individual buyer (and seller) plays an important part in the choice of a real estate asset, particularly if its destination is to be the buyer's own dwelling.
But even so, that market is very sensitive to some collective factors
pi-Some fundamental economic facts (for example interest rates, inflation, demographics, local wealth...)
arrig.
pi-Also speculative collective moves, which are precisely helped by the not too transparent structure of that market.
gif
arrig.estate, price moves are driven essentially by medium term or long term cycle-trends (see that term).
In real
gif At the difference of stock markets for example, there is usually few short term volatility. Actually, it is about impossible to measure day-to-day variations.
pi-piarrig.
arrig.
When
excess strikes
gif
gif
When the roof collapses on the housing credit
All those factors lead to some repetitive excesses, such as booms and busts, or, in financial languages, bubbles and crashes (in prices, in construction volumes...).
Real estate booms and busts have important consequences on finance / banking (bad loans, bonds defaults). Conversely, the financial sphere
can have its own responsibility in real estate fortune or plights.
Real estate price cycles / trends also influence the whole economy (see "wealth effect") and monetary politics.
pi-pi-The Aug. 2007 "subprime lending" crisis, linked to easy money, lending overleverage and exotic and obscure financial vehicles (based on loan securitization) has shown
some
dark sides of real estate finance
arrig.
arrig.
gifgif
Reb - Red

Rebiasing
01/10i,12i - 03/5i + see debiasing, tilting, stock image
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After
pi- debiasing (= spotting one's own biases and adjusting one's behavior in accordance, or spotting market biases and adjusting valuations in accordance), rebiasing can be useful.
Itarrig.
consists in reintroducing anticipated market biases:
gif In the valuation (for example by using the stock image coefficient),
piarrig.
pi-Or in the expected trend appreciation,
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so as
to take advantage of them, but at the same time to avoid one's own biases.
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Recency bias, effect
See memory
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Was there a day before yesterday?

Definition: the recency bias is to give more importance to recent events than to older ones. Also called the short memory (see that word), it is a kind of mental myopia that focuses on the most
recent information and thus tends to forget or neglect more ancient data and the broader historical picture.
A narrow and conflicting mental process

The recency bias seems to contradict the human tendency to be anchored in the past. But in fact it is anchoring in the recent past, which is more easily recallable by the mind.
A common example in asset markets is the expectation (see that word) that the assets which until now have been fashionable will still be popular in the near future.
pi-pi-This is neglecting the risk that the business cycles and/or the rotation (see that word) of investor attention might revert the evolution.
arrig. in which information abound, there are conflicting tendencies inside the human memory (see that word):
In aarrig.
society
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pi-One (short memory) in which the new information replace the previous one in the mindshare (see cognitive overload),
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pi-Another one (long memory) in which, on the contrary, people become vaccinated against new information,
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They tend to resist it and stay focused on old situations (see anchoring, status quo bias...)
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Reductionism
see heuristic, generalization
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Seeing the tree, not the forest.
piarrig.
gif Definition
Reductionism is an oversimplified ("reductive") explanation of a phenomenon. It focuses on one - or on a narrow set - of aspects of a situation instead of seeing the whole picture and all
interactions. It is a form of generalization of a single aspect, which is a recipe for wrong decisions.
Examples related to investment

Flavor of the month
For example, investors might focus on one business parameter and forget others.
pi-In some periods, they look only at interest rates, in others at unemployment, GDP growth, profit growth, trade deficit, country debt or whatever other isolated indicator.
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pi-Or they might be interested only on value stocks or growth stocks, or momentum assets, whatever definition and content they give to such categories (see also rotation)
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Causes
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Lost in complexity and uncertainty
Reductionism can come from:
pi-Cognitive biases, such as availability heuristic, representativeness heuristic, framing, rationalization, anchoring....
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pi-The fact that the world is highly complex and ever changing (cognitive overload),
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Therefore it is hard to grasp its various aspects and to describe its state fully and precisely.
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How to avoid it?

Be fuzzy!
An antidote to reductionism in analysis models might be fuzzy logic (see that phrase), based on the ideas that:
Notions about things are rarely entirely true or false,

Imprecision and uncertainty should be entered as a factor in any analysis, if only to leave room for more exploration.
To classify things in clear-cut general categories with simple criteria (or even assumptions) has a practical interest, but it should be only indicative, knowing its limitations.
Ref - Reg

Reference point, (mental) reference

See anchoring, loss aversion, availability heuristic, prospect theory
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Definition:
a mental reference point chosen by an observer/ player in a dynamical system (for example a financial market) is some initial data from which to compare the
pievolution
and the present state of that system.
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Is it useful and adapted?

Running fast, or staying stuck to the floor?
Relying consciously or unconsciously on a mental reference helps to make fast decisions. Also that reference can be common to all observers as a common frame / starting
point to see some social / economic evolutions.
Whatever the general usefulness of an initial point to start an analysis or to react fast to a new situation, there can be two possible snags:
pi-That reference point can result from anchoring, thus in need to be adjusted to the new real situation,
To use systematically a reference point without digging deeper is a reductive bias (availability heuristic).
arrig.
pigif
arrig. the reference point, usually as an asset price, is a key parameter in anchoring, prospect theory, loss aversion...(see those phrases).
In finance,
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Reflexive, reflexivity, circularity
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gif + see percolation, technical analysis, (Markovian) jump
pi-Regime switching
04/2i
images/
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Changing the rev. per minute is Mozart music for motor fans.
piarrig.
A
gifswitch of regime (an analogy to what happens with a car speedbox) is a crucial change of trend
pi-pi-(For example in asset markets from bullish / greed to bearish / fear) or a strong acceleration or deceleration of the same trend.
It can
take the form of a strong discontinuity (Markovian jump, non-linearity...)
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gifgif takes place when the downtrend or uptrend crosses a "percolation threshold" (see that phrase). That tipping point where the switch takes place is also called in
It often
dynamical system theory the "phase transition point"
One of the thing that technical analysts do is to try to detect regime switching. With mixed results.
pi-(overconfidence in) Regulation
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gifRegret aversion / avoidance / minimization.
piExpected
Regret
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Rep - Rev
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pi-Repetition errors / mistakes

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Do they never learn?
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01/4i, 11i + see persistence, memory
The efficient market theory sustains that people correct their mistakes. Or at least that some players correct the blunders of others, through immediate arbitrage, and thus make
those biases and mispricing quickly disappear.
This overlooks the fact that human behavior, however wise or biased, repeats itself (admittedly with some differences) as seen in the history of mankind and in everyday life.
The main reason is that, after some delay, the (collective) memory of previous mistakes fades / decays.
For example, even investors who have some knowledge in BF, tend to take it as a justification that they are themselves unbiased, not recognizing their own biases.
Reputation (of professionals)
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piReputation (of stocks)
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piRepresentation,
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Representativeness heuristic
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Resonance
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piReversion / reverting / revert
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(to
the mean / to the other extreme)
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piarrig. Regular or erratic pendulum?
02/9i + see peer pressure, pride

See mindshare, availability heuristic, image
pi-Due to their lengths, those articles are in a separate page of the "R" section of the Glossary
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See style of investing
01/12i - 02/8i,10i,11i
+ see fat tails, distribution curve, feedback, extremes, gambler's fallacy
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In theory, markets self-correct their variation anomalies.
pi-Prices are supposed to show a stabilization or a reversion (sometimes called regression) to the mean of the bell curve (see distribution curve).
arrig.
pi-Theoretically also, if we believe in long term efficiency (see that word), the statistical mean would be equivalent to the fair price (see that term).
gif
arrig. happen:
Reversions
gifIn prices and returns,
pibut also in volatility / risk perception (when there is low volatility, any important unexpected event can change it to high volatility).
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pigif
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In reality: to the mean or to the extremes?
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To the center of the playground? Or off-limits?
The market works often differently. Reversions happen and that is why contrarians or value investor sometimes show superior investment performance. But the cycle-trend
phenomenon shows that market price evolutions have a tendency to persist under a process of reversion to the extremes. It takes place as follows:
1) A positive feedback loop / self-replicating epidemics (vicious circle), exaggerates the amplitude and duration of the price trend,
2) Then prices reach an extreme low or high,
3) And then the trend reverts towards the opposite extreme (positive loop in the other direction)
Ri -Rz

pi-(financial) Risk
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pi-(small) Risk
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pi-(Specific / systematic) Risk
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separate page of this "R" section of the Glossary
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pi-Risk attitude, aversion, neutral, preference,
profile,
arrig. seeking, tolerance,
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pi-Risk perception
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pi-Risk premium,
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pi-Risk premia puzzle
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pi-pi-Due to its length, this article is in a separate page of the "PQ" section of the Glossary
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pi-gif
pi-Due to their lengths, those articles are in a
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Rogue trader
See narcissism
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piRotation (of attention, interest, image)
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pi03/11i
+ see magic numbers, range estimate aversion
pi-Round number anchoring
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03/9i + see epidemic, viral communication weak signal, percolation
pi-Rumor dissemination
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RWH
01/9i,11i + Random walk hypothesis (see above)
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pi(*) To find those messages: reach that Behavioral-Finance group and, once you are there, 1) click "messages", 2) enter your query in "search archives".
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pi-separ.gif
Home / accueil
pi-Disclaimer / Avertissement lgal pi.

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arlef.
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Behavioral finance glossary: letter S, peter greenfinch
Behavioral finance FAQ / Glossary (S)

A B C D E F G-H
Sa - Sc
V-Z
Full list

pi-Due to its length, this article is in a separate page of this "S" section of the Glossary
../ Salience, saliency, salient
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See
../
gif utility, preference
pi-(economic, financial) Satisfaction
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(financial) Scam
See deception
../
pigif
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(method of) Scenarios
00/9i,12i +see Bayes, tunnel vision, fuzzy logic, range
../
pigif
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The future has several possible colors
pigif
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When they try to foresee what might happen, people often imagine only one, or maybe only a couple of possibilities. They focus on what they expect will happen or not, and forget to imagine
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other possibilities (see range estimate aversion).
pi-This narrow approach can be explained by various cognitive biases, for example anchoring, framing, tunnel vision.
A typical one is the numeracy bias (see that phrase), the belief that past statistics are religion, thus not imagining the "black swan", the millenary storm, the rare / improbable
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gifevent...
The art of prediction supposes on the contrary to imagine a rather full range of different scenarios, fully or partly different of one another. This helps to apply fuzzy logic or Bayesian
probabilities and to get ready to adjust one's action to the various possible occurrences.
00/9i,12i +see heuristic, paradigm, default of attention, habit, representativeness
../ Schema, Schemata
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Definition: a schemata is a predefined / structured piece of knowledge reduced to a simplified image or outline.
piThis is the case of a stereotype for example.
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Like any heuristic it facilitates reactions and decisions, but which can lead to neglect to dig further.
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../ Script
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See schemata
Sea - Self
../ Seasonal anomaly, Seasonality

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(economic) Sector / concept fad
../
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../ Selection bias
pigif
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../ Selective attention/ exposure/ memory/
perception
/ reporting
pigif
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pi-Selectivity bias
../

04/3i, 06/2i + see calendar effect
See bandwagon effect, paradigm, cycles, rotation
pi-pi-Due to their length, those articles are in a separate page
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of this "S" section of the Glossary
gifgif
file:///C|/Documents%20and%20Settings/desib/My%20Documents/Vocabulary%20May%202...%20Terms/Behavioral%20finance%20glossary%20letter%20S,%20peter%20greenfinch.htm (1 of 9)11/11/2008 15:09:16
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gif
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piSelf adaptation, self organization
See emergence, dynamical system, percolation
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Self attribution
01/3i,5i,9i + see attribution, pride, self esteem, overconfidence
../
piimages/
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Out of self esteem, traders might attribute (see "attribution"):
pigif
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pi-Their successes => to their own skills, this is what is called the "self attribution bias"
gif arrig.
pi-Their failures => to outside influences, which they feel they had no possibility to predict or protect against.
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This
can reinforce overconfidence and narcissism instead of inciting them to adjust their behavior in next cases.
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See overtrading, addiction, boredom, willpower,
../ Self control bias, self discipline bias
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Forgetting the map and following the whims
piDefinition: the self control bias, is in fact the lack of self control and discipline. (for details see the "willpower" article)
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It leads to act not according to one's reason / interest / main goals, but according to one's impulses or feelings.
It might be an innate or learnt personality trait. But sometimes it is just "accidental", as a way to fight boredom and dullness or the result of an intense emotion.
Effect on investors
This deficient self control is a factor in some investment errors (see objectives and precautions), such as, for example:
pi-Focusing on short term performance goals (see time horizon) and neglecting long term needs,
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pi-Overtrading, just on impulses, without a sense of the right timing,
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pi-Or, on the contrary, delaying stock selling because of loss aversion or endowment effect.
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Self
esteem
01/8i + see pride, narcissism, self-illusion
../
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Self esteem (a form of pride) can lead to difficulties to recognize and correct one's errors, thus leading to irrational decisions.
piarrig.
../
gifSelf-defeating prophecy
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A self-defeating prophecy is a prediction that causes an opposite reaction / behavior by the people involved, and which makes the prediction wrong.
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See illusion, magical thinking
../
gifSelf- delusion
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Self-fulfilling prophecy
02/8i + see rational expectations, cascades, feedback loop, trend, reflexivity
../
piimages/
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Self-illusion
See illusion
../
pigif
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Self-serving bias
See attribution bias
../
pigif
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pigif
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Sell - Si
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../ Selling aversion
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Semi-volatility
../
pi-

00/10d + see skewness / asymmetry, volatility
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Definition: semi-volatility is upside volatility or downside volatility (see volatility).
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piIn financial markets, return or price volatility has obviously two directions: up or down. To measure those ups and downs separately is useful, as one side can be higher than
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the other (skew, asymmetry) and each has different consequences.
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Downside volatility
The downside volatility can be considered as a more crucial measurement of risk (*) than full volatility.
The "Sortino ratio" measures the relation between return and downside volatility, at the difference of the Sharpe ratio which measures return compared to full volatility.
(*) also we have to recall (see the risk article) that volatility is just a proxy for the average statistical risk, and that markets are the land of uncertainty and of extreme
variations, which no mathematical indicator can represent fully.
Another thing is that in bull markets the upside volatility might be higher than in bear markets, while in bear markets the downside volatility might be higher.
../ (market / investors) Sentiment
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pi../ Sexual urge
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gifShooting star
pi../
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pi-Short term bias
../
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gif
pi-
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gif emotional bias, genetic utility
See
See glamour stock, fad / fashion
05/10i + see framing, time horizon
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../ Signal, signaling
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images/
04/4i,12i,
06/2i + see APT
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../
pi-Size anomaly / effect
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Is bigger better?
pigif
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Like some other stockmarket effects (PBR - P/B effect, PER - P/E effect), the size effect is a well known market anomaly.
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It takes the form of a stock price premium (or price discount) due to an ancillary benchmark, in this case the company size.
Stocks of big companies are usually overpriced compared to small ones that offer similar economic prospects. Their prices include a premium over those smaller ones, which
are thus quoted at a discount.
There are of course exceptions, as is the case for very specific small companies with high prospects, which enjoy on the contrary a rarity premium.
Does this effect have rational causes?

This effect could be due to
A better notoriety and more abundant information from those corporations
A better market liquidity for their stocks
The fact that big companies have more chance to be included in a major stock index.
This leads investment funds which strategy is to match the index evolution to own them in their portfolio.
But also to some component of the behavioral "image" (see that word), for example the impression that there is safety in mere size.
Sk - So

00/8i,10i - 01/2i,3i,9i + 02/1i,11i - 03/i - 04/2i - 08/1i + see asymmetry, semi-volatility

../ Skew, skewness / Asymmetry
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Small numbers (law of)
03/1i + see (short) memory, gambler's fallacy, numeracy bias, representativeness, rare events
../
piimages/
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The "law" of small numbers, also called the law of small samples, is a statistical bias, inferring probabilities from a too small series of data.
pigif
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pipi-This is often misleading as it can hide rare events (see that phrase).
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It affects
arrig.
arrig.many investors who tend to infer the probabilities of future returns (price rises or falls) from a small period of recent historical data.
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Social,
social anomaly / behavior / bias /
../
pi-pi-Due to their length, those articles are in a separate page
cognition
images/ / effect (general definition)
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of this "S" section of the Glossary
pi../ Social behavior / effect / influence (on
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finance
/
economics)
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pi-Social learning curve
../
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../ Social psychology
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piimages/
Social representation
../
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piimages/
Social responsibility
../
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pi-Social utility
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../
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piimages/
Socioeconomics, economic sociology
../
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pi-Sociopsychology
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../
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piimages/
Soft computing
../gif
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00/9i - 03/12i + see non linear + bfdef3
piimages/
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pigif
Soft
arrig. computing refers to any kind of non linear computing tools based on chaos theory, fractals, fuzzy logic, neural nets, genetic algorithms, artificial intelligence, machine
learning...
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In economics and finance, they are used to complement the insufficiencies of some too clear cut mathematical models such as the CAPM.
Sp

See risk, CAPM

../ Specific risk
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../
pi-(financial) Speculation
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Spin
See
../
gif manipulation, hype, pump and dump
pigif
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Spin glass model
04/1i + dynamical system, agent based model, percolation, power law
../
pigif
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The spin glass model is an agent-based mathematical model that simulates the market.
pigif
It is derived from an analogy to raising temperature in a spin glass. It starts with a phase of disorderly and random reactions, until a critical temperature is reached when
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another phase occurs, which obey a power law.
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This is a phenomenon rather similar to percolation and typical of some dynamical systems, such as the evolution of prices and returns in a stock market.
../ Spotlight stocks
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pi-
See image types, salience
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Spotlight stocks are stocks that benefit at the moment from an abundance of favorable news (or apparently favorable news as it can be just spin) and which are much talked
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about favorably. This could result in overpricing (puffed image).
St

03/8i + see EMH, behavioral finance

../ Standard finance
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The "standard finance" phrase refers usually nowadays to the set of financial paradigms, notions and models that are based on the EMH / Efficient market hypothesis.
piThis appellation distinguishes it from "behavioral finance" which finds some inconsistencies in those notions and which bases its work on "market anomalies", as phenomena
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that do not obey fully those standard laws.
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../ Status quo bias
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See
../
gif representativeness heuristic, fuzzy logic, type, schemata
pi-Stereotype
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A stereotype is an abusive categorization of things, people or phenomena under the same label, such as a representativeness heuristic (see that phrase).
pigif
Sticky (price) stickiness
See underreaction, hysteresis, persistence, cluster, reflexivity, anchoring
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../
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01/4i - 08/5i + see quants, probability, model
../ Stochastics, stochastic calculation
piimages/
arrig.Is the future a mathematical probability?
pigif
Definition: stochastics / stochastic calculation is a branch of mathematics used for statistical analysis of random dynamic processes.
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gif
It focuses on detecting random evolutions in time-distribution (see distribution) and on using those findings to give related previsions by applying laws of probabilities.
In asset markets, stochastic calculation is often applied to the evolution of prices, returns, volatilities... But it can be trusted only to some degree, as those markets are
driven non only by randomness, but also, as most dynamical systems (see that word), by uncertainty.
For example, past volatility, largely used by financial stochasticians, is just a proxy for future risk.
Therefore it should be taken with precautions when making financial projections.
Stochastics, historic probabilities and classical random statistical distribution laws are quite useful. They save the effort to make scenarios but they are a limited substitute to
them. Or let us say an heuristic (see that word).
../ Stock image

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Stock profile / profiling / type
../
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(good) Story, Storytelling
../
pigif
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pigif
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See image coefficient

04/12i + see profile
03/10i - 07/7i + see affect, beliefs, manipulation, rationalization, attribution, framing
If is so interesting, that it must be true, no?

A good story, with a good yarn, good metaphors, some romance or terror, sophisticated concepts, is often more understandable to the cognition, and/or more convincing to
the affect than hard facts.
We have here something close to framing, stereotypes or affect heuristic (see those words), with its benefits and risks / damages.
Storytelling might be useful

It can be used to explain and understand abstract concepts or complex and fuzzy realities.
It is then an attempt to break the "curse of knowledge" (inabilities by experts to explain clearly and simply their knowledge, by accepting
to sacrifice its intricacies).
Even some scientific findings are titled with allegories (bell curve, fat tails, strange attractors, big bang...).
It might also mislead:
pi-When it oversimplifies things (see stereotype),
Or worse when it presents them
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pigif
arrig.either wrongly (see framing),
gif or without bases to support them (see rationalization),
or emotionally more than rationally (see affect heuristic).
This misrepresentation can be done more or less in good faith or deliberately by the "story-teller".
In stockmarkets, the dotcom craze / bubble of the end of the 20th century gave good example of misleading stories.
It is also seen in the art market: artists and art pieces who had a mysterious "interesting" life, get more spin and might become better
rated than those who have a commonplace story, independently of their artistic qualities.
02/8i + see style + see stock management

../ (investment) Strategy
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An investment strategy is a way of investing based on a precise set of actions that tries to fit the situation and to adapt to its evolution.
piIt can derive from a style of investing, see below, except that styles are more permanent and ingrained in the investor's psyche.
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See status quo bias, commitment, anchoring
../ Stubbornness
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Stupidity
See (ir-) rationality
../
piimages/
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Style of investing, trading
../
pigif
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gif
pigif
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Su
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../Sunk-cost fallacy
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piarrig.
08/6i,7i + See commitment, loss-aversion
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Nostalgia for money sunk in history

Better not look back!
The sunk cost fallacy is to take past costs into account in future spending decisions.
It is a fallacy as the only criteria to justify adding money should be that it would be profitable by itself, if not, why spending more?
This bias is somewhat linked to loss aversion and to the commitment effect (see those phrases).
Here are some cases

pi-The temptation, after spending money and efforts in something that turned bad, to go on investing taking the risk to lose more.
The idea is not to lose what has been already invested even if it is already lost and it is not realistic than it can be recovered ("get even bias / get-eventis", see that phrase).
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pi-The accounting confusion between fixed costs and variable costs.
For example to drive more and spend more petrol just to "recoup" the buying price of a car is not too rational.
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gif
In
pi- finance, cost averaging (see that phrase)
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01/2i - 02/8i + see magical thinking, mystique, luck, numerology, belief, hope and fear
../ Superstition
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Can blind guidelines based on coincidences make an uncertain world more certain?
piarrig.
Superstition, a belief that there are certain events to interpret as "signs", and certain things to do - or on the contrary to avoid - that bring good or bad luck.
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Superstition, most of the time, is linked to cognitive shortcuts and to the emotional couple usually labeled "hope and fear".
People have the urge to find explanations (rationalization) about events, because of an aversion to uncertainty. They might have the feeling to see such explanations when
some strange coincidences or clusters of similar facts take place. Not all of them are reproductive, but some people can interpret them as "signs". Then superstitions are born.
Money is a field prone to many superstitions, magic beliefs and rituals.
That is the case of assets prices market variations. They seem somewhat mysterious to many people, therefore they try to find illuminating explanations.
When and this greed in getting whatever explanations is combined with anchoring and various beliefs, it creates a fertile ground for esoteric interpretations and magic
thinking (see that word). This is "representativeness heuristic" (see that phrase) pushed a bit too far.
See (reaction to) information, expectation, disappointment

../ Surprise
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Unexpected money flow or money leak.
piarrig.
In financial markets, a surprise is an unexpected information / event / announcement / signal, which can have an (immediate or delayed) impact on market prices, returns,
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volatility...
Earnings surprises are a classic in this field, being an earnings announcement that differs from what the analyst consensus expected.
Negative earnings surprises (earnings which are below those expected, even if they are growing) usually have more impact on prices that good ones. People are more affected
by disappointment than by higher than expected outcomes.
Market surprise and market efficiency

According to the EMH, only meaningful unexpected information, which normally happen randomly, can change market prices. Under that hypothesis, only surprises should
bring price moves. But in real market life, various phenomena, such as noise trading (see that phrase), may make market evolutions partly independent of such external events.
../ Survivor bias, survival
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02/9i 06/4i + see evolutionary psychology, overconfidence, hindsight bias, overconfidence, luck
piThe survivor bias is the idea that the recurrent winner won because of superior skill and strategy. There is a kind of hindsight bias or rationalization in this.
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This kind of thinking can lead to wrong heuristic decisions or to overconfidence, as it does not take into account:
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pi-The part played by luck in success
The fact that some non-survivors might have used also the same skills and strategy but did not succeed and left the playing field.
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pigif
arrig.
Anyway, it can be also that the players who developed a "survival instinct", by being adaptable to all situations, have better chance to survive in the game (see evolution).
gif
Sw - Sy
../ Swarming
images/
(dynamical / complex) System
../
piimages/
arrig.
System trading
../
pigif
images/
arrig.
Systematic bias
../
pigif
images/
arrig.
Systematic risk
../
pigif
images/
arrig.
Systemic crisis / risk
../
pigif
images/
arrig.
(not to be confused with "systematic" risk)
pigif
arrig.
If you fall, we all fall!
gif

See herding
See dynamical
arrig.
03/5i
gif + see collective bias
(not to be confused with "systemic" risk) See risk, CAPM
See liquidity, crash, rare event, model, epidemic, contagion, domino effect
In finance, a systemic crisis is an exceptional liquidity crisis that extends to the whole financial system by contagion, not only for mechanical reasons (domino theory) but also
with fear and distrust added. It can take the form of:
pi-A lack of counterpart for buyers or sellers in an asset market,
Or a lack of depositors or subscribers in banks, funds or other financial institution (and on the contrary a tendency by them to withdraw money)
arrig.
pigif
Its arrig.
impacts are rarely predicted by economic and financial mathematical models, as that phenomena might not appear in too short statistics (and because of some collective overoptimism
and overconfidence).
gif
pi-separ.gif
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arlef.
pigif
arrig.
gif

Behavioral finance glossary: T-U, peter greenfinch
Behavioral finance FAQ / Glossary (T-U)

A B
Ta - Ti
Full list

(statistical) Tail
images/
94/11i + see fat tail, long tail, extremes, rare events
risk
images/
piTA / Technical
images/
arrig.
analysis
page
of the "T-U" section of the Glossary
arrig.
arrig.
images/
gif
gifgif
piTestosterone
04/08
+ See gender
images/
arrig.
images/
gifThrowing the
images/
piSee capitulation
sponge
images/
arrig.
pigifTilt, Tilting
01/10i -05/8i + see rebiasing, image
images/
arrig.
images/
gif
Adding an ounce or irrationality to a pound of rationality to
pitilt the scales.
arrig.
gif
To tilt an asset valuation is to apply techniques that:
pi-In a first step, use "rational" asset valuation data and methods (see
fundamental
analysis),
arrig.
gif
pi-In a second step, "tinker" with them to adapt them to market
realities
arrig. and biases ("market-based valuation").
gif
pi-Also, in stock-picking, reinforce some risk or price screening
parameters.
arrig.
gif adaptations / alterations of parameters may range from my "image
Those
coefficient" to Sheffrin's "tilted beta".
Time arbitrage,
images/
value
images/
pi-(Investment)
images/
Time
horizon,
arrig.
images/
preference,
span
gif
piarrig.
gif

separate
arrig.
arrig. page
gifgifof the "T-U" section of the Glossary
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Tipping /
images/
Transition
images/ /
Triggering
point
piarrig.
gif
Tra
See percolation threshold, regime switching

See styles of investing, (investor) profiling / type +

pi-Trading pattern,
profile site link
style
arrig.
gif
Transitive
images/
preferences
/
images/
01/7d + see preference
reasoning,
pitransitivity
arrig.
gif
Please, A, B and C, stay in line!
Definition: transitive reasoning is a key logical precept in which:
If
statement A
entails
statement B,
And
If
statement B
entails
statement C,
pi-pi-Then
statement
arrig.
arrig. A
entails
gifgif
statement C.
=> Thus, if A doesn't entail C, there is a lack of transitivity

in the reasoning, a transitivity bias.
Transitivity biases in human preferences and decision

making
Distorted or fuzzy scale
Human beings normally base their decisions on a scale, a transitive order /
hierarchy of preferences (see that word).
This is supposed to be the case for example in economic / financial
preferences and the related decisions.
But, in reality, lacks of transitivity tend to occur in human reasoning when
the decider's preferences (A, B, C, D...) intermingle. Alphabet soup?
Those defects in the transitivity fabric happen for example

when:
The decider faces complex, uncertain and/
or not clear-cut situations, with a wide range
of choices and an information overload,
This makes formal logic hard to apply, or
even sometimes not too relevant (see fuzzy
logic for example)
He is prone to logical fallacies and other
cognitive biases,
He is also subject to emotional biases,
Not to mention some ingrained habits,
automatic reflexes and even addictions,
He is under social influences (mimicry, peer
pressure...).
He lacks information or other means to rank
and satisfy those preferences
Transmission /
images/
dissemination,
images/
diffusion
(of
page
arrig.of this "D" section of the Glossary
piinformation)
gif
arrig.
gif
Transparency
images/
01/1i,2i + see information
premium
images/
pi"Transparent" companies are those that give abundant, frequent, relevant
arrig.
and reliable information. Their stocks are usually quoted at a premium in
gif
the stockmarket.
Tre - Tz

pi-Trend (as
fashion,
arrig. fad or
momentum)
gif
pi-Trend
following
/
arrig.
persistence
gif
pi-pi-Due to their lengths, those article are in a

separate
arrig.
arrig. page
Triggering /
images/
See percolation threshold
Tipping
images/ point
piTrust
See belief, obedience, certainty
images/
arrig.
images/
gif
So sure that it is reliable.
piarrig.
Trust is a positive belief, a reliance verging on certainty, that a person, a
gif
group, an institution, an object, a theory or model, or whatever, will not less
us down.
Trust is a needed component in human and social
relations.
pi-To rely on the counterpart, either a human being
or
an organization, plays a crucial part in business
arrig.
transactions,
gif
and among them in lending (etymologically,
credit = confidence) and investing.
Trust is a factor of economic / financial value.
pi-For example a company stock value is based on
confidence
about the general economic future and
arrig.
on
gifthe qualities and prospects attributed to the
company.
But "caveat emptor" (buyer, beware): trust cannot be "blind" and become a
full dependence and obedience. Some suspicion seems needed in various
situations to keep a rational approach.
Tunnel vision
images/
images/
piarrig.
gif
04/11i, 05/10i + see framing, attention, anchoring,

availability heuristic, cognitive trap, certainty +
bfdef2
Not looking where the tunnel branches out.

Tunnel vision, is an allegory about the tendency to look in only one
direction without seeing what happens at the periphery.
It has some relations with anchoring, heuristic, framing, habit (see those
phrases).
Practically, in a given situation, tunnel vision is a momentary or
permanent inability to imagine other explanations / solutions that the
one that comes immediately to the mind or seems the most obvious.
Examples of such an "instinctive certainty" abound:
pi-When everybody tries to use the same exit door at the theater or store,
imagining,
often wrongly, that "if nobody tries another door it is
arrig.
because
it must be closed".
gif
pi-Or when calling the repairman because the TV doesn't work, without
looking
arrig. if the wire to the roof antenna is plugged on
gif
Type / Prototype
See profile, profiling, style, stereotype, fuzzy
images/
images/
Stocks, as well as investors, can be (with some precaution to avoid
pistereotypes, as category borders are always fuzzy) sorted by types (styles,
arrig.
categories) of behaviors.
gif
Un - Ut

Uncertainty (vs.
images/
risk)
images/
piUncertainty
images/
separate
arrig.
arrig. page
arrig.
aversion
images/ /
gif
avoidance
/
pipremium
arrig.
gif
See delaying tactics, underreaction, certainty effect,
pi-Underadjustment adjustment
arrig.
gif
Definition: under-adjustment is a mental limitation in which somebody
adapts too slowly its opinions and behavior to new situations. This is
something similar to underreaction.
pi-Underconfidence,
underconfident
arrig.
gif
See overconfidence, delaying tactics, underreaction,

certainty effect
Afraid to be wrong or unable to make the good choice.

People might be under-confident in their possible performance
(compared to what they deem to be a good result).
Effect #1: when it freezes decision
Underconfidence tends to make people, and among them investors, freeze
decisions (see delaying tactics, status quo bias...).
For example because of under-confidence, many investors might
procrastinate when they face events that change the prospects. They delay
the needed action (buying, selling...).
pi-pi-This translates into an underreaction in market prices. Price
adjustments
will therefore take place fully only later and be gradual
arrig.
arrig.
instead
gifgif of instantaneous.
This is considered as the main explanation of momentum / trends.
Effect #2: when it leads to mimicry
In some cases, underconfidence makes investor easily influenced by other
people advices without checking by themselves if the advice is sound or if
they can be trusted.
pi-pi-Underconfidence seems to be also one of the factors of herding.
arrig.
arrig.
Underconfidence
should not be confused with pessimism (or
gifgif
optimism)
As under / over confidence is about ones' own abilities, it does not
necessarily entail pessimism or optimism about market prospects.
pi-pi-You can be certain or uncertain that your pessimism or optimism is
right
or wrong in the present market situation, just choose your option ;-)
arrig.
arrig.
gif other hand, some social mood theorists link market rises and falls
Ongif
the
to waves of collective over / underconfidence, leading to general optimism
or pessimism
pi-Underpricing /
overpricing
arrig.
gif
pi-Undertrading
arrig.
gif
pi-Underreaction /
overreaction
arrig.
gif
pi-Unfair
arrig.
See price anomaly, mispricing + bfdef2

See status quo bias, delaying tactics (and the
contrary: overreaction, overtrading)
page
arrig.
arrig.
gifgif
08/6i + see fairness
gifUnintended
piconsequence
arrig.
gif
pi-Utility (in
economics
and
arrig.
finance)
gif
pi-(expected) Utility
arrig.
pi-Utility
gif
maximization
arrig.
gif

page
arrig.
arrig.
gifgif
separate
arrig.
arrig. page

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Behavioral finance glossary V-Z, peter greenfinch
Behavioral finance FAQ / Glossary (V-Z)

A B
Val
Full list

(asset, stock)
images/
Valuation
images/
pi-Value
piarrig.
(fair) price /
arrig.
pigif
Value,
valuation
gif
arrig.
gif(economic /
piexpected
/
arrig.
intrinsic)
gif
stock Value
pi-(extrinsic) Value
arrig.
gif
pi-Value investing
arrig.
gif
pi-Value puzzle
arrig.
gif
pi-Value stock
arrig.
pi-Value trap
gif
arrig.
gif
Vi - Vo
Value /
valuation page
Value /
valuation page
Value /
valuation page
Value /
valuation page
Value /
valuation page
Value invest.
page
Value /
valuation page
Value invest.
page
Value invest.
page

pi-Vicious / virtuous
circle
arrig.
gif
See feedback, reflexivity
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When the hungry snake bites its own tail

Definition: vicious / virtuous circle are series of positive feedback loops
(reactions that amplify the initial moves).
They are virtuous circles if they make the situation better and better, and
vicious circles if they worsen it continuously.
Economic examples
Money-go-round.
Those circular patterns are often found in consumer behavior or investor
behavior. Here are three examples:
In case of inflation, due to some shortage of
goods or services, people protect themselves by
accelerating their purchases.
pipi-This creates more inflation (vicious
circle).
arrig.
arrig.
gif
gifsame phenomenon happens, but on the
The
virtuous side, when economic growth makes
people confident to buy and invest more.
pipi-This makes the growth last longer
(virtuous
arrig.
arrig. circle).
gif
gif in asset markets, price rises bring more
Also,
price rises, and price falls bring more price falls.
When the phenomenon accelerates (for example when inflation not only
persist, but when its rate rises) it can be called a (vicious / virtuous) spiral.
07/6i See meme, epidemics, contagion, percolation,
pi-Viral
communication
critical threshold, rumor diffusion, buzz
arrig.
gif
It multiplies and spreads, and multiplies and spreads, and
multiplies...
Definition: viral communication is the diffusion of information (either true
facts or plain rumors) between individuals by self replication...
Receivers reproduce and send them in their turn, becoming "contagious
agents", whence the analogy with viruses. Such an "epidemic" aborts if it
does not not break through a critical threshold (in this case a large enough
mass of people).
Well, this does not means that viral communication is a disease, it depends
of the quality of the virus, in other words of the information.
Human networks and viral infiltration

Spreading the virus via the social blood system.
Viral communication is usually a spontaneous phenomenon that affects
existing human networks.
But it is also sometimes used as a manipulative tool (*) in marketing (viral
marketing, buzz marketing), in cult diffusion and, last but not least, in stock
"promotion". The issuers try to infiltrate those networks to perform their
spin.
Sometimes also they are just spamming, often not too successfully: except
in situations when people are highly gullible, it is not so easy to get people
interested in every "buzz". People have ...viral antibodies.
pi-Virtual economy 07/05d
arrig.
gif
pi-Volatility
arrig.
pi-(excess) Volatility separate page
arrig.
arrig.
gif
arrig.
pi-(downside) or
gifthis
gif "V-Z" section of the Glossary
of
gif
(semi-)
arrig. Volatility
gif
pi-Volatility cluster
arrig.
pi-Volatility smile
gif
arrig.
pi-Volatility puzzle
gif
arrig.
gif
We
Weak, neglected,
images/
overlooked
signal
images/
piWealth effect
images/
arrig.
images/
gif
piarrig.
gif

page
of this "V-Z" section of the Glossary
arrig.
arrig.
gifgif
03/2i + see house money effect
Burning money when feeling rich

Definition: the wealth effect (or affluence effect) is the tendency of people
to spend more than their income in periods when they feel richer just
because the prices of stocks, real estate or other assets they own are
bullish.
pipi-Not only they amputate their other savings but they often borrow on
the
base of the value of those assets to finance such spending.
arrig.
arrig.
gif
gifThey might discover later that asset markets become bearish. Sudden
poverty effect?
Here the mental accounting (see that word) is reverted, no mental
compartments here, all money is considered the same, whatever the
differences in volatility / safety
Economic consequences
Overspending (whether it is due to wealth effect or to lack of income)
tends to boost the economy, and sometimes to overheat it.
If the price rise was just a bubble and ends in a market crash, some owners
realize they could not afford such spending, and they put a brake on it. This
can bring an economic backlash.
Wealth frame
03/2i + see frame
images/
images/
Weather bias /
images/
pi03/8i,12i + see also calendar effect.
effect
images/
arrig.
pigif
Some studies has shown that markets are more bullish / optimist when
arrig.
there is good sunny weather.
gif
Physiological feelings of pleasure or pain are factors in emotions, such as
optimism or pessimism.
Wil - Win

(bounded)
images/
Willpower
images/
piWinner's curse
images/
arrig.
images/
gif
piarrig.
gif
pi-pi-Due to its length, this articles is in a separate

page
of this "V-Z" section of the Glossary
arrig.
arrig.
gifgif
01/1i,2d - 03/8i - 04/4i + see perverse effect + bfdef2
Victory has its cost

Definition: a winner's curse is experienced by a winner in a contest when
the negative effects of the victory supersede the positive ones.
Is also called a Pyrrhic victory (from Pyrrhus, king of Epire, after beating
the Romans in 279 BC, saying "another victory like this one, and I'm lost").
The case in finance

Highest bidder's curse,
Whatever the applauses, was it worth it?
In finance, the potential buyers might have to fight against a fierce
competition in some cases such as,
An auction,
A take-over, or other kinds of M & A (Mergers & Acquisitions),
An IPO (Initial Public Offering),
Or just in market trading on the euphoria of a bubble.
To get the prey, the winner has to offer the highest price, or to accept a
price rise. He might ultimately do an extravagant high bidding to catch it.
All the more if he is driven by his ego (trophy investment).
pipi-This might put him/her into unforeseen trouble as he/she often finds
later
that his exuberance (or arrogance) made him/her overpay the asset.
arrig.
arrig.
gif
gifThe fake happy end hides in fact an "heroic failure", and sometimes a
"kiss of death".
What can make a winner fall in his own trap?

Overvaluing its prey or prize
The winner might have deluded himself because of:
pi-Mental biases, that range:
arrig.
- from cognitive ones, such as naivety, availability heuristic,
gifframing,
- to emotional ones, such as greed, excitation, herding,
overconfidence or pure hubris,
pi-But also difficulties and imprecision (or even asymmetries of
information)
to evaluate the deal.
arrig.
gifEven if the average biddings are circling the "normal" value, the
winner, being the highest bidder, could have made an overvaluation
even if using rational criteria.
Wis- Z

02/8i - 03/1i + see overconfidence, optimism,
magical thinking, commitment, rationalization,
belief + bfdef2
Wishful thinking
images/
images/
piTrusting a rosy vision?
arrig.
gif
Wishful thinking (or need to believe), a form of blind optimism (see that
word), by which people prefer to interpret situations as leading to a
pleasant outcome and avoid to embrace the idea that less rosy realities are
possible.
It is a common bias among human beings, that might come from their
aversion to uncertainty. It can be interpreted as a desire by people to feel
good and to avoid mental discomfort, by considering that:
pi-Things will come out right for them,
arrig.
pi-They can mentally influence destiny (see magical thinking).
gif
arrig.
More
generally, there seems be a "need to believe" in mankind. It might
gif
help to accept the world by interpreting it favorably. Wishful thinking can
be a moral help to keep on living among overwhelming difficulties. But it
can be also be damaging if it leads to passivity.
Wishful thinking in investing

For example, after investing in a stock with disappointing results, investors
tend to find good reasons (rationalization) that it will be a winner in the
end, while neglecting the adverse aspects.
Yin-yang asset
images/
See fundamental, image
valuation
images/
piYin-yang asset valuation combines hard parameters (see fundamental
arrig.
analysis) and soft ones, such as behavioral factors (see image).
gif
Also it is more flexible than binary analysis (if one-sided researches or
presentations can be called analysis)
Binary logic focuses blindly on one aspect and rejects an alternative one.
On the contrary, a yin-yang combination of those two factors takes into
account that, although they oppose each other, they also intermingle and
compensate each other in a dynamical way (see range estimate aversion,
fuzzy logic...).
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Behavioral finance glossary / FAQ / encyclopedia: alphabetical table; peter greenfinch

Behavioral finance FAQ / Glossary /

click the letter link in the related box.

* Alternation (of trends)

* (Greed &) Fear

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Behavioral finance glossary / FAQ / encyclopedia: alphabetical table; peter greenfinch

* Reputation (of stocks)

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* Buy and hold

of, reaction to)

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Behavioral finance glossary / FAQ / encyclopedia: alphabetical table; peter greenfinch

* (price, return, market)

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* Noise trader / Noise

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* (getting) Even, get

* Expectancy bias / effect

* Perceived risk, risk

(followed in next column)

Members of the Behavioral Finance Group, please vote on the

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Behavioral finance glossary, letter A, peter greenfinch

Behavioral finance FAQ / Glossary (A)

Dates of related message(s) in the Behavioral-Finance group (*):

00/8i,12i + see distribution / accumulation, congestion / (price) cluster, percolation + bfdef3

Active / passive investing

Buzzybee vs. Hibernatus

Dates of related message(s) in the Behavioral-Finance group (*):

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Behavioral finance glossary, letter A, peter greenfinch

00/10i,12d + see overtrading, commitment, willpower, habit

How to resist it?

I feel like it!

08/i,8i,11i - 03/1i + see ethical, moral hazard, perverse incentive

01/5i - 03/2i,8i,9i,12i - 04/2i + see style

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Behavioral finance glossary, letter A, peter greenfinch

See system trading

Alpha coefficient (excess / insufficient return)

00/6d - 01/9i - 02/7i,8i + see (sector) rotation

Does the lottery wheel choose its winners and losers?

Alternation (of trends)

00/6i,7d,8i + 01/11i + see cycle, trend + bfdef3

08/6d + see ethics, needs, fairness, genetic utility

Moral incentives vs. money incentives

01/2i + see uncertainty

Dates of related message(s) in the Behavioral-Finance group (*):

(mental) Anchor / Anchoring

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