Behavioral finance FAQ / Glossary (Anticipation)

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

Year/month, d: developed / discussed, i: incidental

Anticipation

See Bayesian, expectation, fundamental, probability,

speculation, betting

Finance and the future are close cousins.

Financial operations, investing and borrowing to start with, are bets on the future.

Financial players try normally to anticipate evolutions.

Markets transform anticipations into prices.

An important job for the economy that is performed, or is considered to be performed by markets

- and notably by financial markets - is to:

Determine adequate prices, taking the "bets" made by their players as good anticipations

of the evolution of economic fundamentals.

Also help those players to adapt those personal anticipations / expectations

by adjusting them to new events that change probabilities (the Bayesian approach).

Can anticipation work?

Can we see farther than the tip of our noise?

It seems that markets anticipate the broad evolutions, maybe better than the expert's consensus,

but far from perfectly, as some crises have shown.

This anticipation process has some shortcomings:

The general uncertainty of social and human phenomena of course cannot

easily be overcome,

But how can you take any initiative in life if you never anticipate what could

happen, whatever the fog?

Anticipation is a main trait of human beings.

To renounce it (therefore to renounce taking risks) is to be condemned to a

vegetative or purely reflexive life. Well, some call it "transcendental".

Anticipating 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.

They can damage their money management results.

See all the "biases" cited in this glossary.

Market anticipation is not only influenced by economic prospects,

but also "contaminated" by the financial market evolution

itself (see expectation, reflexivity, cascade, mimicry...)

This can foster excesses and crises (see bubble, crash).

(*) 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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