Behavioral finance FAQ / Glossary (F)
Fa - Fai
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
FA
See Fundamental analysis
separate page
of the "F" section of the Glossary
07/10i - 08/6d + See fairness
of the "F" section of the Glossary
See 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", in their economic decisions and behaviors,
people often tend to take into account not only their own interest but also:
Fairness to others (as a sense of equity
, of justice),
"common good"
even if does not fully fits their own economic interests or put them at risk,
For example:
money, many people might strive to
- or at least argue that they strive to - do it at a "fair price" (see that phrase) to all parties,
whatever that means.
that they consider too imbalanced.
Many will reject that unfair "ultimatum" as an abusive moral pressure and indignity,
even if they would gain some money by accepting it for a lack of a better choice.
A negative mirror of fairness is envy (see that word), a misattributed feeling of injustice.
Fal - Fat
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed/ discussed, i: incidental
of the "F" section of the Glossary
of the "F" section of the Glossary
07/5i + see home bias, neighborhood effect
Investors tend to put their money into activities and businesses they feel close to (home bias).
Another aspect of familiarity is the "parrot effect": when an information or opinion is repeated,
if only by the same person or source, it tends to become familiar and seems relevant.
Repetitions can give an impression of truth!
See fad
of the "F" section of the Glossary
Fe - Fr
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
of the "F" section of the Glossary
of the "F" section of the Glossary
See emotion, pain and pleasure
Feelings are physiological perceptions that come
They are more or less pleasant or painful (see pain and pleasure).
They have an influence on decision-making, sometimes at the detriment of rational criteria.
Feeling can take over thinking!
05/6i + see gender attitude
See cycle, volatility
See anchoring, reductionism
See trend following, mimicry, herding
00/12i + see commitment + bfdef2
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 shape / pattern than those large ones. Like Russian dolls.
This 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 prices
Stock price charts tend to look like fractals.
Large price variations (in several months or years) have often a roughly visually similar shape,
but in a bigger scale, to daily ones.
They might also be analyzed as intermingled fractals (multifractals).
of the "F" section of the Glossary
Fu - Fz
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
08/6i + See peer pressure
Do they deliver?
Fund manager are often accused of sharing various common professional biases,
such as overtrading, imitation, peer pressure. They are said to override rational
expectations and wise practices, and bring
counter performances.
This is a debatable generalization as everyone has its own style.
But it is true that some contagion / conformity can take place in some market circumstances.
There are some ambiguities about measuring fund
performance
(the famous "alphas") and finding relevant benchmarks.
* They are focused geographically on only one market for one asset class,
they do not represent the entire range of asset markets.
* Also, in the case of stock indexes, they do not include dividends.
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.
Life cycle
It is also often advised not to rely fully on a manager's recent performance.
This is because its management style
(and / or its computer trading system)that was perfectly adapted to a past market situation might be
inadequate, even harmful, when the market enters new grounds.It might be better to hire the managers (or invest in the funds) who have shown the worst
performance in the, say, last three years than those who were the market stars in that period.
Of course after analyzing why they missed the train.
of the "F" section of the Glossary
01/1i + see liquidity squeeze
Anticipate the traffic jam at the expressway entrance or exit!
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 / a liquidity squeeze
in which
an asset price has either to rise or to fall strongly before any
transaction can take place and a more stable equilibrium is met.
This phenomenon is due to:
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/polls
This page last update: 01/01/12 Back to BEHAVIORAL-FINANCE GALLERY
