Behavioral finance FAQ / Glossary (E)

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Ec -Ef


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

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

Economic behavior

See behavioral economics

Economic man



Due to its length, this article

        is in a separate page

of this "E" glossary section

(behavioral) Economics



Due to its length, this article

       is in a separate page

of this "E"glossary section

(evolutionary) Economics

See evolutionary economics / finance

(market) Effect


See perverse effect, calendar
effect, size effect, P/E effect,

APT, momentum effect,
anomaly, etc.

Same (unclear) cause, same (strange) effect?

Can it offer an hidden opportunity?

A market effect is a specific type of anomaly, inefficiency.

In financial markets more specifically, is a 

discrepancy in price and return that is:

Not explained by economic fundamentals

But which is so recurrent and / or persistent that

it seems to obey its own law / follow its own norms, thus entice
practicians to take advantage of them (see "arbitrage pricing
theory") (*)

Therefore it might not be fully...anomalous.

Markets have their own life !

 
(*) OK, but beware not to become overconfident that the sequence
      will repeat
.

Some pundits might give convincing explanations and tempt
many
traders and investors to use it.

Why not, but it can become a fad that will lack steam quickly,
and the effect revert or dissolve into irrelevance.

The calendar effect, size effect, P/E effect (see those phrases), election cycle
(in the US for example) are well known cases.

A massive and highly repetitive case is the momentum
effect
(see that phrase), by which a price rise or price fall persists
for a long time (possibly several years).


We have here the well known trend-cycle phenomenon (see trend,
bandwagon, overreaction...).

It creates a growing discrepancy between prices and "fundamental"
values ...until a largely overdue correction strikes, often violently.

The "effect" 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" glossary section

Eg -Em


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

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

(primacy of the) Ego / egomania

See narcissism, pride,
 overconfidence

(return, price) Elasticity

See beta coefficient for
  elasticity / sensitivity in finance

EMH

See Efficient Market Hypothesis

Emergence



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

of this "E" glossary section

Emotion, emotional

Emotional bias

Emotional intelligence / literacy / reasoning

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

of this "E" glossary section

Empathy

See genetic utility, ethics

En - Ep


Dates 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" glossary section

Entrepreneur psychology and behavior, Entrepreneurship


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

of this "E" glossary section

Envy

See fairness

What does he/she find in her/him?

Envy is considering without solid reasons that some other people have undue 
advantages or successes.

It can be seen as a negative mirror of the fairness feeling (see fairness), as a
(often) misattributed feeling of injustice.

Envious / vengeful reactions can.

=> motivate desperate moves (wild gambles or financial speculations
     among others...)

=> try to justify some misdeeds (see moral hazard for example).

Epidemic


00/12i + see meme, diffusion,
percolate, viral
communication,
salience, contagion, systemic risk

When seeing the first symptoms, be on the watch!

1) Medical definition

Epidemic is the stage of diffusion of an "infectious" agent when it starts

to   self-replicate at an increasing speed.

2) Definition of information epidemic

This medical parallel can be applied to some information or even
rumors
, which raise a sudden popular interest and spread rapidly,
while othersnever find an audience and a recognition outside small circles.

Financial epidemics?

When a bank has a cold, others can get the flu.

In the worst case scenario, in financial matters, such contagion can
bring a systemic risk / crisis (= one that would affect all financial institutions).

For example, the fall of a financial institution might

* endanger others that have financial relations with it,
* bring also a distrust towards still other ones

....until the whole system can collapse in a domino effect.

Eq


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

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

(dynamical) Equilibrium



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

of this "E" glossary section

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 (normally positive) average

difference of returns between:

Market-listed stocks (the average reference being the stock index),

And Treasury bonds, which returns are normally considered as the
   for riskless investment
benchmark...

...well, if the country is financially safe, something not so common
nowadays.

This notion entails a puzzle that is detailed in this glossary risk premium article.

Et - Ev


Dates 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" glossary section

(getting) Even, get-eventis

See loss aversion,
cost averaging

OK, I want my money back!
But is it sensible?

Definition:

Trying to "get even" after suffering a damage is a strong human tendency,
that extends to investor attitudes such as:

An aversion to sell a losing investment, until recovering the initial
   price paid, which might be illusory.

Or even a tendency to increase the amount of that 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 reaction might also reflect a cognitive bias, an anchoring in past prices

as if they were still the fair value.

Evolutionary economics / finance



Due to its length, this article

       is in  a   separate page

of this "E"glossary section

Exe - Exp


Dates 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 lengths, those articles

       are in a separate page

of this "E" glossary section

 

Expected utility

See a full definition
  in the "utility" article.

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" research methods

(small group games, role playing, individual experimentations,
and, for researches on more extensive population samples, polls and
questionnaires)

which purposes are:

To understand how people or groups of people take

    economic or financial decisions,

To observe the (positive or negative) results of such decisions on those
   
people specifically and, through extrapolations, on the economy more
   generally
(for example the effect on prices, on growth...

This practical approach differs from a theoretical one, the game theory (see
that phrase).

Those two fields of research can give different results, but there are relations
between them.

Experimental economic has its limitations.

Behaviors within little groups, and in which consequences are often only
virtual
for the players as well as for society in general, can differ from those
of a large and diversified mass of people in the real economy.

Ext


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

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

(market) Externalities

00/1i - 08/3i + see ethics,
  unintended consequence

Look what you did to me!

Definition

In economics, externalities are

beneficial or detrimental, conscious or unconscious,
consequences of the actions of some economic players
on other players.

Beware of your car leak,
somebody might trip on the oil patch!

All players with a direct or indirect interests that can be affected by the decisions
of one of them
are often called "stakeholders".

Types

Here are two examples:

Negative externality: the cost of the pollution created in a given industry
    could fall on other actors
who have no direct interest in that business.

Positive externality: non travelers who are real estate owners can benefit
   
from a  new motorway or railroadif if it makes more attractive the local
    real estate.

A way to "internalize" those effects is to have the responsible parties
pay for the damages (or better try to avoid them) or be given
...a share of the benefits.

Externalities are often involuntary and unforeseen (see unintended
consequences)

(law of) Extremes, extreme risk



02/10i - 03/12i - 04/9i,11i +
see risk, distribution anomalies

(Pareto power law), rare,
reverting, over/under-reaction,

fat tails, tail risk, long tail.

Aversion to the middle?

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.

The theory of extreme events (or law of extremes) 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.

The probability of extreme risks, is usually underestimated,
they are less "rare" (see that word) than usually thought.


Or match some other combination, either asymmetric, or

symmetric with an extreme concentration in the middle
and two small ones at each end (see leptokurtosis).

Peter Greenfinch's stock image model takes into account a range of
extreme image coefficients.


Extrinsic value

See the
 (extrinsic) Value article.

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      1) click "messages", 2) enter your query in "search archives".

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 vote on the glossary quality at BF polls

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This page last update: 04/09/15
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