Behavioral finance FAQ / Glossary (E)
Ec -Ef
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
Economic behavior
See behavioral economics
separate page
of this "E" section of the Glossary
of this "E" section of the Glossary
See evolutionary economics / finance
See perverse effect, calendar effect, size effect, P/E effect,
APT, momentum effect, etc.
Same (unclear) cause, same (strange) effect?
Does it really offer an 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:
recurrent (*) and / or persistent that it seems
to obey its own law / follow its own norms. (see "arbitrage pricing theory")
Therefore it might not be fully...anomalous.
(*) This gives a possibility for investors to take advantage of the anomaly.
OK, but beware not to become overconfident that the sequence will repeat.
Some pundits might give convincing explanations
and many traders and investors might be tempted to use it.
Why not, but it can become a fad that will lack steam quickly,
the effect might revert or dissolve into irrelevance.
The calendar effect, size effect, P/E effect (see those phrases), election cycle (in the US) 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...)
(economic, technical)
Eg -Em
Dates of related message(s) in the Behavioral-Finance group (*):
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See narcissism, overconfidence, pride
See beta coefficient for elasticity / sensitivity in finance
See Efficient Market Hypothesis
of this "E" section of the Glossary
of this "E" section of the Glossary
See genetic utility, ethics
En - Ep
Dates of related message(s) in the Behavioral-Finance group (*):
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of this "E" section of the Glossary
of this "E" section of the Glossary
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 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).
00/12i + see meme, diffusion, percolating, 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 others
never 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,
and 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
of this "E" section of the Glossary
03/8i - 04/2d,6i,10i - 05/6i - 07/5i + see risk premium
Definition: the equity premium (EP) is the average
..if the country is financially safe, something not so common nowadays.
This notion entails a puzzle that is detailed in the risk premium article in this glossary.
Et - Ev
Dates of related message(s) in the Behavioral-Finance group (*):
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of this "E" section of the Glossary
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
losing investment until recovering the initial price paid,
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.
of this "E" section of the Glossary
Exe - Exp
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
06/2i + see behavioral corporate finance
of this "E" section of the Glossary
See the "utility" article for a full definition
See (fair) value
04/ 3i + see definition at "overconfidence"
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
(group games, role playing, individual experimentations, questionnaires)
which purposes are:
economic or financial decisions,
(for example the effect on prices, on growth...)
This practical approach differs from a theoretical one called the game theory (see that phrase).
Those two fields of research can give different results, but there are some relations between them.
Experimental economic has its limitations.
Behaviors within little groups, in which consequences are only virtual,
can differ from those of a large 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
00/1i - 08/3i + see unintended consequence, ethics
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".
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.
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 better try to avoid them) or be given ...a share of the benefits.
Externalities are often involuntary and unforeseen (see unintended consequences)
02/10i - 03/12i - 04/9i,11i + see distribution anomalies
(Pareto power law), rare, reverting, over/under-reaction,
fat tails, tail risk, long tail, risk
Aversion to the middle?
Economic / financial data are usually
unstable and
The theory of extreme events (or law of extremes) states that those data tend to, on the contrary:
extreme values (Pareto "power law"),
as is the case for prices in case of bubble or crash
due to herding and overreaction.
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.
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.
(*) 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
This page last update: 17/11/11 Back to BEHAVIORAL-FINANCE GALLERY
