Behavioral finance FAQ / Glossary (G-H)

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Gam - Gar


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

Gamble / Gambler / Gambling

Gambler's fallacy / paradox


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

of the "G-H" glossary section

Game playing

Game theory


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

of the "G-H" glossary section

GARCH / ARCH models

00/6i,10i - 02/02 - 04/9i + see
heteroskedasticity
distribution,
volatility, stochastic +  bfdef3

Watching the dancers moves,
from a tango to a waltz.

GARCH and ARCH models (*) are mathematical tools that measure how volatility
evolves
, showing how variable and stable / instable it is.

(*) GARCH = General auto regressive conditional heteroskedasticity.

They are used, for example, in financial markets.

In most of those markets, prices rise or fall more or
less erratically, with a price volatility that changes
with time.

Price volatility often increases in periods of high uncertainty that
follows some unexpected
and hard to gauge event.

Also, bear markets, in which people are worried, are usually more
volatile than bull markets in which they are more confident (even
overconfident).

Those tools more generally, as financial markets are just cases among others,
apply to various other statistical areas prone to "stochastic calculations"
(see that word).

Their purpose is:

To take into account the instability that can surge in time series

(non-constant variance / non-constant deviation: see heteroskedasticity).

To include those measures in probabilistic valuations or prediction
   models.

Ge - Go


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

Gender attitudes to money management

08/2i
+ see style

Mars and Venus?

Studies have shown that, although generalization should be avoided,

Female investors would be more risk averse, less optimistic and impulsive

in their decisions than male ones.

They might avoid adventurous investments, but on the other hand would get
lower overall return.

Young males see their testosterone level increase strongly when 
   facing choices.
   They tend to make riskier, and sometimes more irrational, moves.


Other differences (see "style") are between:

Wealthy vs. poor (risk is a different thing for them),

Young vs. old (they have normally different time horizons)...

Generalization

See reductionism, heuristic,
stereotype

Genetic algorithm, computing

Genetic utility


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

of the "G-H" section of the Glossary

Get even bias, Get-eventis

See commitment, cost averaging,
loss aversion

Glamour stocks

03/5i,9i - 05/1d + see fashion,
growth stock + image types

Investors' darlings.

Glamour stocks are highly popular stocks ("hot" stocks).

Most investors attribute them extraordinary
qualities and growth prospects.


In parallel, their price rises in a spectacular way.

Those fashionable stocks tend to become highly overpriced
as their image coefficients reach stratospheric heights
.

Investors tend to delude themselves in their appreciation of their
future performance and to overpay such investments.

Their fame is due to:

Their past economic performance (cult companies),

People might think that such a past trend is representative of the future
trend (see representativeness heuristic).

An increasing information flow about their strong price rise, as it
    gets noticed by more and more people and media.

That information surge tries to present, comment, detail or explain that
price rise
(see availability heuristic, rationalization, good story...), usually
with enthusiasm if not delirium.

This voluntary or involuntary "spin" might take place even when the
company has nothing to support those positive expectations
: no
profitability record, nor credible future earnings scenarios.

There are two main types of glamour stocks,
     which it is important not to confuse.

Beware of counterfeited growth.

1) Among those highly popular stocks, some are legitimate "growth
    stocks"  (see that phrase), but they are often overpriced.

2) Others are "shooting stars", as extremely fast rising stocks, but with
    illusory qualities.

They might become later ..."fallen angels" (see that term).

They might be OK for very short term trading, although often with high
risks entailed, but much less for long term investment.

Goal



Due to its length, this article

    is in a separate page

of the "G-H" glossary section

Goodhart law

See numeracy, reflexivity,
observer bias, goal

The Goodhart law is a symptom of numeracy bias.

When a statistical indicator is widely used as a target , the players'
behaviors start to change.

It happens that:

Not only there is some "observer bias" (see that phrase) by which the

observer changes unconsciously the phenomenon observed (see reflexivity
for another example).

But also people who have a personal interest in the outcome try to meet 

the numbers instead of aiming at fulfilling the real purpose behind.

Thus the numbers get biased, or even manipulated,
and lose their benchmark usefulness

Statistics should always be taken with some doubts. Under the appearance of
solid realities, they might cover real uncertainties.

Gr


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

Greater (or bigger) fool delusion



04/9i +
See rational expectations,
mimicry, cascades,
herding,
pyramid, overconfidence,
bubble, delusion, illusion

Hoping my naivety will be surpassed by the next sucker.

Definition:

The greater fool delusion is to buy an extremely overpriced asset
(under any rational valuation
standard), after a long price uptrend, on the
idea that a greater
fool  will buy it later  at an even higher price,
before the music stops and the price crashes down.

That (overextended) "trend following" phenomenon, by which investors keep on
buying (or avoid
to sell) assets although they know that they are overpriced,
is one of the factors that help bubbles persist and grow.

How to explain that behavior?

Assumptions about assumptions about assumptions...

There might be some rationale in the assumption by an investor / trader
that there is a good chance that somebody else will do ...the same
assumption
and catch the grenade before it explodes.

But it can also be a delusion, as the investor has no certainty that the pool /
torrent of greater fools will not dry up unexpectedly in the immediate future.
In that case the greater fool will be himself.

There is here some overconfidence (see that word) as
the investor feels
he will be the one who find the right
time to sell before the other foolish investors
start to sell massively.

Also rationalization, such as inventing new - but wild - valuation criteria
to justify the current or expected price can boost it.

This is a mother lode of gullibility that some gurus / pundits might exploit.

The book that predicted the Dow Jones at 36,000 is among the most caricatural
examples.

Greed (& Fear)



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

of the "G-H" glossary section

Group behavior

Groupthink


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

of the "G-H" glossary section

Growth investing / Growth stock


01/6i - 02/8i,10i,12 - 03/1i -
08/6d
+ see value investing,
fundamental analysis, glamour
stock + image types

Buying it because of its price or because of its speed?

Definition:

Growth investing is picking stocks on the basis of their past and expected
future earnings
growth (growth stocks).

It is sometimes opposed to "value" investing, a style of investing which - in its
most simplistic form - is more interested in the stock present earnings compared
to its price.


Where to find growth?

Growth investing might be done by choosing stocks:

Either on the basis of their price
    compared to strict fundamental criteria about the business growth 

prospects, and also to forward-looking stock valuation parameters

This can be called prospective analysis and valuation.

The trick is to find stocks that are undervalued in relation with their growth
prospect.

In this case, the difference between what is called a growth stock or a value
stock is not too wide.

Or on the contrary by extrapolating the past growth into the future,

without being too much interested in the price paid.

Here similarities might be seen with trend following.

This belief that yesterday good weather guarantees tomorrow good weather
might sometimes prove right, but it entails the risk of falling into a naive
growth strategy
.

Gu


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

Gullibility



See attribution, disinformation,
belief, greater fool, illusion,
magical thinking, manipulation,
rationalization, story, wishful
thinking, etc..

Look twice and think twice!

People have a tendency to believe certain things or certain people without digging
further, sometimes against any reason.

This overwhelming attraction and the wish to believe is the source of
gullibility.

When people are under a strong emotion (happiness or gloom, love or hate,
greed or fear) they can be more gullible than in calmer times.

So better cool off before taking decisions!

When collective gullibility affects
    financial markets

Nearly all financial bubbles have been watered by the

GG&H cocktail: Gullibility, Greed and Herding

Beware when you see market bartenders serve it
and market players drink it!

A widespread phenomenon

Gullibility explains many human and social interpretations, analysis, attitudes,
decisions and behaviors.

This glossary shows many forms and consequences of that bias:

Attribution, disinformation, greater fool delusion, illusion, manipulation,
rationalization, story, wishful thinking, etc., not to forget self-delusion.

Gunning

See funnel

Gunning is a specific funnel effect in financial markets, that results specifically
from
technical analysis and stop loss orders.

It might happen that a quantity of people (or computers), who use the same
chart analysis or
program trading method, place stop loss orders (either as
a hedge or as a speculative move) more or less at the same price.

=> If this occurs in a shallow market, the price equilibrium can be reached
         only   with an exaggerated price change.

Guru

00/6i,8i + see obedience,
manipulation

Love them and follow them ...at your own risk!

Often, groupthink or crowd behavior is directed by one or several manipulative /
excessively charismatic leader(s) or guru(s).

They gain a strong influence (based on excessive trust / blind admiration /
passionate love, sometimes coupled with fear) on the other participants.

This goes to the extent of short circuiting their own thinking ability,

or even enslaving them or making them adopt excessive and
damaging behaviors.

The guru phenomenon has some similarity with the blind "obedience to
experts" one (see that phrase).

As already said, that phenomenon can also be a factor of groupthink /
group behaviors / herd behavior when it comes from or leads to an
assembly of followers.

Investment gurus, although their power are rather diffuse can have a strong
influence on investor behavior

Ha - He

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

H coefficient, exponent

03/12i + see Hurst coefficient

Habit



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

of the "G-H" glossary section

Halo effect

See availability heuristic,
confusion

Beware, a horse with good teeth
might not be fast at the Derby.
Beware also, not all quadrupeds are horses.

The halo effect is a mental bias / as a misperception or reasoning confusion

* in which we extend a good or bad trait of an entity (person, organization,
   thing) to the perception of  the whole entity. Good teeth, good horse ?
* or in which we apply - wrongly - what we know or feel in a domain to
   another field
.


This is a kind of availability heuristic (see that phrase).

As an example, to base economic previsions upon negative or positive political
principles can be misleading.
Another one is to consider a stock as a good investment because we are happy
about a specific trait
of the corporation (a product for example)

Heavy tail

See fat tail

Hemline theory

See (social) mood

Herd instinct, behavior, mentality, Herding


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

of the "G-H" glossary section

Heteroskedasticity


00/10d - 01/11i + see ARCH /
GARCH models,
volatility,
(volatility) cluster + bfdef3

Welcome to "heteroskedasticity",
the BF word which is the champion in the number
of syllables,


Eight of them (this is immediately followed by 
"representativeness" with just one less).

Definition (general): heteroskedasticity is an an unequal mathematical

"variance"between statistical variations at different times.

Definition (in market finance): In market prices, heteroskedasticity
    takes the form of unstable volatility.

It is an alternation / regime switching between periods of higher / lower volatility.

It could be called the "volatility of volatility".

See also (volatility) clusters, cycles.

How to measure it?

Heteroskedasticity is a probabilistic / stochastic (see that word) phenomenon that
can be measured in statistical time series by using ARCH / GARCH models
(see those acronyms)

Heuristic (bias / shortcut / limited)

(availability, representativeness) Heuristic

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

 of the "G-H" glossary section

Hi - Ho


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

Hindsight bias


00/6i 03/11i + memory,
mental account, survivor
bias + bfdef2

I knew it before it happened!

The hindsight bias is the idea, after an event, that we knew that it would
happen
, even if we didn't have any opinion, or we were not so sure about it,
or worse if we thought something different.

In finance, this bias affects investors who have forgotten their original
estimates or objectives but feel they have a gift to understand things in advance.

When seeing the outcome, they are likely to use it as a mental
anchor
(see that word) and assume their estimates must have been
close to it
.

They think they predicted from the start what finally happened, with the
motto: "I knew it all along and always told so".

This anchoring can also lead them to unrealistic expectations for the future,
in the form of either overconfidence or underconfidence.

It can create the illusion that uncertainty does not exist for you as you are so
smart that you can easily predict things.

Home bias

 

01/2i - 02/9i + see
neighborhood effect,

availability heuristics

If I feel that all goodies are at home, why wander outside
in the big world jungle?

Well, maybe because you might miss something!

Definition:

The home bias (or "proximity bias" or "familiarity bias", or "neighborhood
effect") is a rather common tendency by investors - mainly stock investors -
to put a too big share of their money:

In their own turf / backyard (own country, region, firm...),
   this is pure home bias,

And in things they see everyday (familiar companies and industries),
   this is the "neighborhood effect".

Is this tendency rational?

This kind of primitive / instinctive selectivity has its pros an cons:

  Pros:

The home bias might avoid mistakes that could be due to venturing
   
into unknown territories.

Cons:

It might rest on an illusion of knowledge and information

For example people investing in the same business in which
they 
work get a double bad surprise if something goes wrong
for that business.

Such a narrow approach of investment leads to an over-concentration

on a few assets and goes against risk diversification,

It is also an obstacle to find or exploit better or safer opportunities,

that globalization and business evolutions offer

It can be compared to an "anti-selection" as insurers say,
even if it has the merit to focus on what investors (might) know
well.

Hope (& fear)

See greed & fear, optimism,
wishful thinking

(investment) Horizon

03/4d + see time horizon

Hot hand

See overconfidence

House money effect

.02/10i + see endowment
effect, mental compartment

Serious money vs. fun money.

People are usually rather cautious on the risk/return prospects when they invest
their hard earned savings.

But not all monies are considered worthy of the same care (see mental
compartments).


Therefore they usually become less timid when they invest
specific types of funds:

Money they manage for others

(although, sometimes it can be the other way round, as they get
less passionate, less dependent of greed and fear when their own
prospects are not at stake),


Or (nouveau riche effect), money that was easily, unexpectedly,

suddenly earned or got by chance.


Or, more simply, surplus money.

Investors are usually careful when investing their initial savings, or
reinvesting that initial investment.

But once this operation rewards them with profits or revenues
(house money), they take more risk when re-investing that
surplus.

On the other hand, let us look at the bright side, they are in those cases
less prone to the disposition effect
on such assets when their value is
falling, as long as there is some gain left.

This is also because their "reference point" in the "prospect theory"
(see that phrase) is their buying price.

Hu- Hz


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

Hubris

04/4i,10i - 07/7i + see pride,
overconfidence, narcissism

Hubris is an excessive pride (narcissism) or presumption (overconfidence)
that can affect
individuals or group.

It leads to not well-thought and excessive decisions and behaviors,with negative
consequences.

Hurst coefficient, exponent


01/3i,10d,11i - 03/10i,11i,12i

+ see H coefficient,
persistence, long memory

Does the trend persist or perish?

Definition:

The Hurst coefficient (or H coefficient) measures statistically the persistence of
a phenomenon.
.

It is a number that measures, in a sequence of historical data, if some patterns
are persisting (market trends for example).

If the coefficient is above 0.5, the trend is considered persistent and to show 
    
a "long memory".

Under 0.5 the trend is considered to be in decay or inexistent.

Hype

04/8i + see manipulation,
spin, pump and dump

Hyperactivity


05/10i + see overtrading,
noise trading, attention
disorder, boredom

Hysteresis



02/05i + see lag, latency,
underreaction, delaying
tactics,
cognitive overload,
diffusion, cycle

At first, nothing seems to happen.
This is because the magma may take time to erupt.

Better make moves before the surprise!

Definition:

hysteresis (commonly called lag, inertia...) is a delayed
(lead-lag) or slow response (underreaction) to an event.

It is a phenomenon found in physics (magnetism) but also used as an allegory
concerning reactions to information.

It is due to:

1) either a slow, and not immediate, diffusion of information (see that
    phrase),

2) or a slow understanding of its importance for the future (because

of cognitive overload, and sometimes of cognitive dissonance)

3) or an underreaction in taking decisions and acting

accordingly, related to collective or individual psychological biases
(procrastination, delaying tactics...).

In markets,
that underreaction creates a price - or a price trend - "stickiness".

(mass, crowd, collective) Hysteria

02/7i + see crowd,
mass, herd, fad

Collective hysterias are extreme forms of herding, such as collective panic or
greed verging on delirium...

In stockmarkets those mass behaviors lead to exaggerated rise or fall
(bubbles and crashes).

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

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This page last update: 19/08/15  
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