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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

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* 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, Get-eventis* 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* (economic, financial) 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 / chaos-determinist walk01/1i - 02/10i - 04/8i - 05/1i + see norms, peer influence / pressure, groupthink, mimicry, contagion, consensus, herdingThe 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, volatilityDefinition: 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 Due to its length, this article is in a separate page of this "C" section of the Glossary

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

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Behavioral finance glossary: letter C, peter greenfinch

(thought) Contagion 02/10i + see epidemic, conformity, domino effect, groupthink, mimicry, peer pressure, consensus, viral communication, critical threshold + bfdef

Contrarian / contrarianism Due to its length, this article is in a separate page of this "C" section of the Glossary

(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-CrDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

Corporate behavioral finance, corporate governance 03/12i - 05/2i + see corporate behavior article

Cost averaging 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 averagingGathering 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 Due to its length, this article is in a separate page of this "C" section of the Glossary

Craze See fad, crowd, hysteria

Critical point / threshold / mass / coupling / temperature / cluster, etc. 01/1i - 04/1i - 06/8i + see bifurcation, percolation, contagion + bfdef



Crowd behavior 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

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 behaviorGetting 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 crowdsQueuing 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-CzDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

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 decisionsMarket 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 Due to its length, this article is in a separate page of this "C" 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

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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 R S T-U V-Z Full list

Da - DeDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

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

Doing our Rebiasing

1) General level.Spotting collective investors biases that explain anomalies in market price levels, returns or trends.

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 levelObserving 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 Due to its length, this article is in a separate page of this "D" section of the

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.

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going from demonization to deification.

Delaying tactics Due to its length, this article is in a separate page of this "D" section of the

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 - DisDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

Diffusion / dissemination (of information)

Due to its length, this article is in a separate page of this "D" section of the Glossary

Disappointment aversion 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 asymmetricPeople 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) 00/12i - 03/9i + see transmission

(trend) disruption See non linear, bifurcation, percolation, dynamical systems



(price, return, market) distortion See anomaly, mispricing, inefficiency

(statistical) Distribution curve anomalies

Distribution / Accumulation phase

Due to their length, those articles are in a separate page of this "D" section of the Glossary

DivDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

Divesture aversion See endowment effect

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 puzzleImagine 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 - DyDates of related message(s) in the Behavioral-Finance group (*): Year/month,d: developed/ discussed, i: incidental

Dominant mental interest

See cognitive overload, fashion, anchoring, dissemination of information, selective exposure, rotation, attention



Flavor of the month.

Collective dominant interest in marketsA 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 interestPersonal 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

Dot-com / 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 uncertaintyWhen 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



This page last update: 29/09/08 Back to Behavioral-Finance Gallery

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Behavioral finance glossary: letter E, peter greenfinch

Behavioral finance FAQ / Glossary (E)


Ec -EfDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

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 behaveSmart 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 -EmDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

(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 ...marketsIn 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 thresholdThe 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 evolutionsThat 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

Due to their length, those articles are in a separate page of this "E" section of the Glossary

Empathy See genetic utility, ethics

En - EpDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

Endowment effect Due to its length, this article is in a separate

page of this "E" section of the Glossary

Entrepreneur psychology and behavior

Due to its length, this article is in a separate page of this "E" section of the Glossary

Epidemic 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.

EqDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

(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 financePush 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 - EvDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

Ethical, ethics (in decisions / info),

Due to its length, this article is in a separate page of this "E" section of the Glossary



(getting) Even, get-eventis See loss aversion, cost averaging

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 approximationEvery 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 - ExpDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

Executive behavior 06/2i + see behavioral corporate finance

(mathematical) Expectancy (of value)

Expectancy bias / effect

(rational-mimetic) Expectations

Expected return

Due to their length, those articles are in a 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.

ExtDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental



(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/under-reaction, 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.


Members of the Behavioral Finance Group, please vote on the glossary quality at Behavioral-Finance/

polls




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Behavioral finance glossary: letter F, peter greenfinch

Behavioral finance FAQ / Glossary (F)


Fa - FaiDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

FA See Fundamental analysis

Fad / Fashion Due to its length, this article is in a separate

page of the "F" section of the Glossary

Fair (deal) / unfair 07/10i - 08/6d + See fairness

Fair price / value / valuation

Due to its length, this article is in a separate page of the "F" section of the Glossary

FairnessSee 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 interestsAlso, 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 - FatDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

(logical) Fallacy Due to its length, this article is in a separate page of the "F" section of the Glossary

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 See fad

Fat tails / wings (in distribution curves)


Fe - FrDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

(Greed &) Fear Due to its length, this article is in a separate page of the "F" section of the Glossary

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 See anchoring, reductionism

Follower See trend following, mimicry, herding



Foot in the door 00/12i + see commitment + bfdef2

Fractals / Multifractals

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 pricesStock 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 - FzDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

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 index-related fund.

Also cost information is usually not fully transparent

Life cycleIt 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

Fundamental investors / traders

Due to their length, those articles are in a separate page of the "F" section of the Glossary

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 Due to its length, this article is in a separate

page of the "F" 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/

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Disclaimer / Avertissement lgal



Behavioral finance glossary: G-H, peter greenfinch

Behavioral finance FAQ / Glossary (G-H)


Gam - GarDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

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 Due to their length, those articles are in a separate page of the "G-H" section of the Glossary

Game theory

GARCH / ARCH models 00/6i,10i - 02/02 - 04/9i + see heteroskedasticity, distribution, volatility, stochastic + see bfdef3 site link

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 - GoDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

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

. Due to their length, those articles are in a separate page of the "G-H" section of the Glossary

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

Glamour stocks 03/5i,9i - 05/1d +see fashion, growth stock + image types

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.

GrDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

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) Due to its length, this article is in a separate page of the "G-H" section of the Glossary

Group behavior 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, conformityBetter 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

GuDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

Gullibility See attribution, disinformation, greater fool, illusion, magical thinking, manipulation, rationalization, story, wishful thinking, etc..

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 - HeDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

H coefficient, exponent 03/12i + see Hurst coefficient

Habit Due to its length, this article is in a separate page of the "G-H" section of the Glossary

Halo effect 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 Due to its length, this article is in a separate page of the "G-H" section of the Glossary

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

Due to their length, those articles are in a separate page of the "G-H" section of the Glossary

Hi - Ho Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

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 informationFor 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- HzDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

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, fadCollective 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).






Behavioral finance glossary: I-L, peter greenfinch

Behavioral finance FAQ / Glossary (I-L)


Il - ImDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

(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 See liquidity squeeze

Illusion of competence, experience, knowledge

Illusion of control

Due to their lengths, those articles are in a separate page of this "I-L" section of the Glossary

(stock) Image coefficient

Due to its length, this article is in a separate page of this "I-L" section of the Glossary

Imitation 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 peopleSome people learn also by opposing other people, but counter-dependence can be a kind of dependence, not to be confused with real autonomy.

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Effects of imitationAping 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 - IndDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

Inaction See indecision, status quo bias, delaying tactics

(perverse) Incentive

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



Stick and carrotDefinition: 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) Independent (in decision distribution)

00/6i,8i - 02/8i + see 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 - IrDates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental

Inefficiency, inefficient

Due to its length, this article is in a separate page of this "I-L" section of the Glossary

Inertia See hysteresis, delaying tactics, status quo bias

Information (incidence of, reaction to)

Information anomaly

Information asymmetry

Information bias Information

cascade Information

dissemination Information

economics Information

overload (mental)

Inform