Behavioral finance FAQ / Glossary (C)

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Ca


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

Calendar effect



Due to its length, this article
       is in a separate page

of this "C" glossary section

Capitulation

02/6i - 07/4i - 08/7i
+ see crash

Farewell to arms and to stocks

An opportunity to enter the arena?

Definition:

in an asset market, a "capitulation" is

A sudden big general price fall in one day.

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
.


Why, when, how does it take place?

It occurs when nearly everybody, including investors who were still
expecting a recovery, cannot stand anymore the pain of
repetitive disappointments (such as continuous fall, or false
market rallies).

Then they 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 reaches a peak.

And then?

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 criteria is not only a brutish fall but also a massive
transaction volume
, it might mean that some "big hands" are buying,
taking advantage of the crumbling prices : see "accumulation".

This interpretation makes contrarians (see that word) see capitulation
as a signal that the recovery is ready to start. Seen the clue, Watson?

CAPM / Capital Assets Pricing Model


Due to its length, this article
       is in a separate page

of this "C" glossary section

(Information) Cascade, cascading



Due to its length, this article
       is in a separate page>

of this "C" glossary section

Ce


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

Certainty effect



04/10i - 08.6i + see expected
utility, risk aversion,
cognitive
trap, belief, overconfidence
(sure thing effect).

Beware of certainties built on sand.

Definition:

The certainty effect is

A 100% belief that what is anticipated (and usually wished for)
will take place
.

In economics and finance this attitude, as a denial of the risk probability,
distorts the "risk aversion" and puts a thorn in the "expected utility"
theory
(see the articles about those phrases).

Let us recall that in those "normal" approaches, people prefer a prospect that
offers with certainty a small gain to one of a much larger gain that entails a risk.

But what if this large gain becomes perceived as certain?

Those notions get biased when people deem as certain

a prospect that is just a belief (see belief).

In such cases, that sentiment might be present after a period of repetitive
lucky or unlucky strikes, as the players do not adapt their judgment to
more mundane fundamental realities.

We have here (see those phrases) pseudo certainty, sure thing effect,
mixedwith cognitive dissonance, selective perception, base rate fallacy...

Effect on the market price

Mystic or fool?

The certainty effect might contaminate most players, for example in the case of
an asset price bubble.

It results in lowering the risk premium, or even reverting it from positive to
negative,

In such periods, most people forget that assets are risky
as they got immerged in the certainty that the Grail
of eternal price rise has been found.

This gives to those who do not believe that a new Eden has been found an
opportunity
to sell to a "greater fool" (see that phrase) who still believe the
myth.

Ch - Cl


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

(market) Chart, Chartism, Chartist

03/11i,12i + see TA

Join the dots!

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)

(the other trick, that would impress your neighbors, worried that you
will launch a space rocket from your backyard, is to use quantitative
analysis methods with mathematical equations).

Actually, there are various sub-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 erratic but decisive evolution phases found
in dynamical systems (see that phrase).

That theory tries to find some hidden order, some determinism (chaos-
determinist walk) in what appears as a pure random walk.

Attractors, fractals, percolation, bifurcations (see those words), sensitivity
to initial conditions, (the famous "butterfly wings effect"), critical threshold
and other exotic designations. are important themes in chaos theory.

Chaotic periods in economics and finance

Economics and finance are themselves dynamical systems subject to some
of those chaotic phenomena.

Stock price fluctuations seem to reflect in some degree 
chaos theory models, with alternations of:

Chaotic phases
   (high volatility with non linear jumps and no clear trend).

  They create uncertainty and can end in bear market or crashes.


  Nearly stable phases: stases (neutral market) or 
    quasi linear trends.

Also, when crossing some threshold, a "phase transition" might occur (see
percolation),
for example when a "trigger" price is reached in an asset market.

Cheating

See moral hazard,
deception, ethics

Honest cheating?

There seems to be a rather widespread tendency in human behavior

to consider cheating (and typically one's own cheating) as rather

inocuous or even "fair" in order to rebalance disadvantages

and to miscalculate the risk of being caught and its negative consequences.

This type of "rationalization" might throw a light on other behavioral phenomena
such as "moral hazard", deception, lack of ethics (see those words)...

Choice

See decision,
behavioral economics

Closed-end fund discount

 

The stocks of some companies that own an asset portfolio tend to be
priced by the markets well below (let us say between 20% and 50%)
the sum of the ndividual market values 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 few experience to see if the same phenomenon / anomaly apply
to private equity funds

(price, volatility) Cluster / Clustering

Cluster illusion

Due to their lengths, those articles
       are in a separate page

 of this "C" glossary section

Co - Col

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

Cobweb effect

See cycle

Cognition

Cognitive asymmetry

Cognitive bias / distortion / flaw

Cognitive consonance / dissonance

Cognitive manipulation

Cognitive overload

Cognitive psychology

Cognitive trap

Due to their lengths, those articles
        are in a separate page

of this "C" glossary section

 

 

 

 

 

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

03/11i + see manipulation, consensus

Com


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

Commitment effect



Due to its length, this article
      is in a separate page

of this "C" glossay section

Common Good

08/6i + see altruism,
needs, ethics

Common Belief / Convention / Knowledge / Paradigm

00/8i,9i,11i - 01/2i + see belief,
meme, memetics, P/E, paradigm,
social effect / learning + bfdef2

Definition

A common convention / paradigm is a concept / explanation / assumption
shared by most members of a group or society and which
affects their decisions
.

That mutual knowledge can be tacit or expressed, proven or
questionable, useful or not.

A financial 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 directl information whether a stock is expensive or cheap.

Better dig deeper about the stock prospects, to find what signal the
P/E really gives.

Compartmentalization

See mental accounts

Competence effect (aka illusion of competence)

See overconfidence

Competition - cooperation


See ethical, game theory,
ethics, experimental
economics,

Fight them or join them?

Behavioral economics, experimental economics and game theory consider
cooperation and competition as the two alternative adaptation strategies
between human beings
.

Thus those various fields of knowledge devote some of their research to spot
in which situations people tend to cooperate and in which others they tend
to compete.

They also try to find out if and when such behaviors are:

either instinctive,

     or on the contrary deliberately / consciously chosen,

are performed for motives that are

either ethical,
or emotional,
or based on self-interest.

Complacency

See overconfidence

Complex system,
   Complexity theory

03/2i,12i + see chaos
theory, non linear,
dynamical systems,

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 + see automaticity

A compulsion is a an inner (*) behavioral incentive that is so extreme that
people do not resist it
even when it goes against their interests and their life
goals or ethics.

(*) independent of an external stimulus

Computer driven trading

see model

Conf - Cong


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

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

Human being adopting distorted laws of robotics

One of the first scientific study on conformity
was the "Ash experiment" by Solomon Ash in 1958.

Definition:

Conformity is an alteration of personal attitudes,
beliefs or behaviors
, that leads somebody to

apply blindly a group's formal or tacit rules
and practice
, whatever the possible effects 

(or in informal groups, leads him/her to behave like its
peers
).

Such alterations can be attributed to group pressure / peer pressure
(see that phrase).

Why does the influence work on us?

Emotional and rational factors can both play a part:

To follow such pressure is mostly emotional (and often unconscious,

as an obedience habit / automaticity), and it is difficult to resist it.

But conformity is also partly rational, as a
    "social adaptation" tool,

a behavioral contract often accepted when to dissent might
bring dangers.

Smartness or naivety ?
Wisdom / adaptation or capitulation / cowardice ?

This is a case by case appreciation

For example, not to follow the trend in a stock market has

also itsdangers, 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

See halo effect

Thinking mix up

In the strict sense, mental confusion is a lowering of mental abilities.

It makes to take something for something else.

Therefore, mental confusion

     Might extend a good or bad trait seen in an entity (person, organization,
        thing) to our perception of  the whole entity (halo).

Makes prone to misread situations and to see false similarities or

complementarities (representativeness heuristic, halo effect, even
superstition..., see those phrases)

Well, information overload (see that world also) can contribute to that
flaw.

Can also make emotions override rational thinking.

For example, when making economic or financial decisions, people
may confuse their preferences (wishful thinking or magical thinking) or
their frights, with real probabilities.

Whatever the cause, it can obviously be a source of wrong decisions
and moves
For example an investor might confuse a cyclical stock in a rising
phase with a growth stock.

Congestion


01/11i + see (price) cluster,
accumulation,
distribution,
consolidation, volatility

Definition:

A price congestion or consolidation in an asset market is a phase of low
volatility
when prices do not move much. (see cluster),

How to interpret it?

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.

Cons - Conv


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

Consensus



Due to its length, this article
       is in a separate page

of this "C" glossary section

Conservatism bias

07/3i + see status quo bias,
underreaction

Consolidation

See congestion

Conspiracy theory

05/10i

Consumer (behavior, choice, preference)


08/2i, 10/11i + see decision,
behavioral economics,

preference

Consumer behavior and customer behavior (a customer can be the
             buyer, or the
consumer, or both) is related to

* the person's preferences
* also
its financial means

Such a behavior cannot be fully predicted as preferences (see that word)
are not stable and behaviors are often distorted (see behavioral economics /
bias)

Marketing specialists try to study "segments" of people with similar
attitudes or behaviors (see profile).

(thought) Contagion



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

Contrarian / contrarianism



Due to its length, this article
      is in a separate page

of this "C" glossary section

(illusion of) Control

03/1i,2i - 04/3i
+ see definition at "overconfidence"

Conventional wisdom


See conformity, consensus, social
influence,
social learning, heuristic,
common convention

Conventional wisdom, as ways of reasoning that about everybody share,

can facilitate understanding and decision-taking as a kind of
   "collective heuristic",

but with the risk that that "convention" (see comformity) might
    overtake "wisdom".

Cor-Cr


Dates 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



Due to its length, this article
      is in a separate page

of this "C" glossary section

(speculative) Crash / Bubble



Due to its length, this article
       is in a separate page

 of this "C" glossary section

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

Due to its length, this article is
       in a separate page

 of this "C" glossary section

Cu-Cz


Dates 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,

Due to its length, this article
       is in a separate page

 of this "C" glossary section

Curse of knowledge

See story

Cycle / cycle-trend



Due to its length, this article
       is in a separate page

 of this "C" glossary section

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This page last update: 11/08/15

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