Behavioral finance FAQ / Glossary (I-L)

A    B    C    D    E    F    G-H    I-L    M    N-O    P-Q    R    S    T-U    V-Z

Full list

Ig - Il


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

(rational) Ignorance

08/3i + see cognitive overload

A person choose rational ignorance when it renounces to dig for extra
knowledge if it would
cost more than the benefits it would get by using
it to make decisions.

Illiquidity

See liquidity squeeze

(Cognitive) Illusion

Illusion of competence, experience, knowledge

Illusion of control

Due to their lengths, those articles

are in a separate page

of this "I-L" glossary section


(stock) Image coefficient



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

of this "I-L" glossary section

Imitation



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

of this "I-L" glossary section

Inaction


See indecision, status quo bias,
delaying tactics, default decision
preference

(perverse) Incentive



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

of this "I-L" glossary section

Ind


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

Indecision


07/10i + See decision, delaying
status quo bias, default solution
preference

(non) Independence, (non) Independent (in decision distribution)

00/6i,8i - 02/8i
+ see distribution

When minds glued together bend data randomness.

In order to find a pure random distribution in a statistical series of
data.the phenomena that are measured should be "independent".

This means that

Those phenomena should not be linked to one another

(= related to a common cause, or having a cause-effect relation...).

The frequency of any event should not depend of the frequency of
    another one
.

The serie of data should not be too short (law of large numbers).
    Several years or even decades might be needed.

The case of asset markets

When assets lose their war of independence.

In the stock market, for a distribution (of prices, returns, etc.) to be
random, independence should relate to:

Not only fundamentals (there should be a sufficient diversity of firms),

But also the market players' psychology.

To stay independent they should normally not always share the same
attitudes and analyses and they should not take similar decisions.

In practice, investors tend to influence /
contaminate
one another in their decisions.

This makes that the stock market data distribution
fails to obey fully the independent psychology
condition.

This creates price and return distribution anomalies (cascades
      of price rises or
price falls), that stray from "random laws"

(see distribution).

Ine - Ir


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

Inefficiency, inefficient



Because of its length, this article
    is in a separate page

of this "I-L" section of the Glossary

Inertia

See hysteresis, delaying tactics,
status quo bias

Information (incidence of,
   reaction to, role of)

Information anomaly

Information asymmetry

Information bias

Information cascade

Information dissemination

Information economics

Information overload

(mental) Information processing

Due to their lengths, those articles

are in a separate page
of this "I-L" glossary section

 

 


 

 

Instinct

08/12d + see automaticity,
intuition, decision

Intention, intentionality

See goal

Contrarily to what behaviorism, at least in its primitive form, reductively
states,

People moves occur not only as reactions to external stimuli,
They can also be driven by self generated intentions.

When those inner intentions get clearly organized within the mind they
become precise goals.

Of course, some intentions might be collective, making people act or
react more or less similarly.

Intrinsic value



02/12i - 03/2d 04/4i -
04/5i 05/10i + see (fair /
intrinsic / economic)
value, extrinsic

Intuition

See automaticity, instinct,
decision

Investor psychology / style

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

of this "I-L" glossary section

Irrational, irrationality


01/8i,11i - 02/4i,7i,9i,10i -
03/10i - 04/4i,5d,9i - 05,1i

+ see rational, rationality

Dealing with stupidity

The words irrational / irrationality are obviously the opposite of rational /
rationality
(those notions and their financial / economic aspects
are detailed in their
related glossary articles).

Those words relate to decisions that have all chances to be
harmful  as going against one's interests or goals.

When an individual or collective move is performed, an irrationality can
interfere,

either in the observation of the situation,

or in its analysis,

or in the decision itself.

Here a behavioral bias (see that phrase), which origin is cognitive or
emotional, is at play.
How to spot it?

Hidden under a coat of rationality?


The problem in many cases, it that it is not too easy to qualify an action
as
rational or irrational:

It depends on the definition of rationality: see that word.

It can be judged only post-facto, when seeing its outcome.

And - which is more difficult - it can also be judged only after

trying to take out the role that pure luck / unluck played on
that outcome ;-)

J


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

January effect

See calendar effect + 05/12i

(Markovian, quantum) Jump

See percolation, quantum leap,
non linear, bifurcation.

Jumping beans on the market stall.

In time series data, abrupt and important statistical changes are sometime
seen , for example market price evolutions.

Those disruptions in a linear or fuzzy evolution, are in some cases
called quantum (or Markovian) jumps. They can be linked

* either to some cycle that is proper to the system and that will self-correct,

* or to some deeper and more persistent evolution of the system.

Those jumps signal therefore:

Either a rare unexpected

accident (see
rare event, small number)

which is


* Only temporary, thus staying fully
   compatible
with the system,

* And not really altering its random
   law.

It just shows, as it is strays from the 
other data, that the statistical
"distribution tail"
is longer than
seen in too short time statistics or
too small samples.

Or a trend reversal:

an old trend breaks and a
new one starts, here again

without changing the
system itself.





Rain and sun alternate, but the climate
itself  for a given area
changes little
years after years (whatever the
butterfly wings do, the system is
rather "robust").

This is the case when a "bubble
bursts" or a currency loses value
suddenly (see peso problem).
It might change only marginally
the economic / financial system
bases. Capitalism survives!

Or a more fundamental
   
mutation of the

system itself, a new
move
that leads to an
irreversible
state or
situation, with emerging
traits.


It is often due to a percolation (see
that word)
above a critical threshold.

Here, the jump is only the
quantitative aspect of the qualitative
evolution that is behind.

A famous / infamous example was
the "new economy"(and "new
finance / new capital", with a
derivative markets overuse,
frenzied online trading or other
unfit financial innovations).

K


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

Kiss of death

See winner's curse.

Knowledge, Knowledge acquisition


01/9i + see information learning,
paradigms, common conventions
,
memetics, (illusion of) knowledge

Knowledge, and its main fellow components, information and learning
(see those words), are
among the most powerful engines (in common with
innovation) in today economies.

The problem is that individual as well as collective knowledge
and information are often biased
  , as cognitive
and emotional biases might interfere.

Whence various flaws in knowledge acquisition (see learning).

Knowledge asymmetry

See asymmetry

(illusion of) Knowledge

03/2i - 04/ 3i + see illusion,
overconfidence

Kurtosis


02/7i,11i - 03/8i + see fat tail,
distribution curve,
rare event,
cluster, asymmetry

Dents and bulges, what happened to the bell?

Kurtosis is a mathematical indicator that measures how much a statistical
distributiondiffers from a "normal" bell-shaped Gaussian curve (see
distibution curve).

  It is found for example in market prices and returns evolutions

What kurtosis tells

It shows how the dispersion of data from the mean is larger or shorter,
flatter or peakier, regular or clustered, symmetric or skewed, compared to
that normal distribution.

It takes for example into account clusters (etymology: kurtosis =
bulge
) of events, or on the contrary voids (scarcities of events),
that might appear in "wrong places" (*) of the curve when
compared to the perfect bell outline that fits the normal random
law.

(*) located for example in the centre, or at the ends, or on one side
     (asymmetries)

A glimpse at leptokurtosis, as an example

Leptokurtosis (see that word) is

* a higher than normal concentration of data near the
   mean,

*  combined with fat tails.

A dissident camel showing a very high, narrow and peaking
bump in the middle and two small bumps at each end.

Market price variations tend to be leptokurtotic.

Most of the time the volatility stays close to the average,
and suddenly extremely strong rises or falls happen.

La - Le


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

Lag, latency

02/5i + see hysteresis

Laziness / Lazy thinking

04/8i + See heuristic, default
of attention, status quo bias,

(rational) ignorance,

Laziness when making decisions (for example about investment), takes
usually the form of skirting the "homework
" of digging deeper for
information and analysis.

Here are the possible consequences:

It can have some rationale in effort saving
            (see for ex. "rational ignorance").

But it often leads to simplified heuristic and imitative
            or routine behaviors, that causes wrong decisions.


Another form of laziness is under-trading / underreaction (see those
words)but, after all, overtrading might be even more damaging.

Lead & lag

02/5i + see hysteresis,
rotation

Learning (social)

00/12i + see knowledge
acquisition, imitation, habit

Learning by walking in other people's steps

Some behaviors are considered as innate.

But many others are learned via social contacts and
interactions
and chiefly through
imitation (see that word).

People learn some behaviors by themselves, via their own discoveries, but
they also learn many behaviors from one another, inside the social context
in which they live. "In Rome, do like the Romans do".

Can social learning go too far ?

As a consequence, people might be "under influence" and not decide
all the time on their own free will or their independent analysis,

evenwhen they think so.

Well, it is normal that society has its own rights. One of
them is to help individuals learn proper behaviors.

The problem starts if the usefulness of those common /
conventional ways of thinking and doing are never
questioned, even when they become oppressive
or counterproductive.

But what about individual and autonomous
     learning?


On a more individual side,
narrow social frequentation as well as
uncritical and overspecialized learning,
might also create noxious
habits, illusions of knowledge and cultural biases that distort the analysis
of facts as well as behaviors.

Such narrow learning might be obsolete knowledge or be unsuited to
different situations or evolving ones.

De-learning is needed to get rid of obsolete knowledge that stifle
     
adaptation or of bad habits

Leptokurtic distribution, leptokurtosis

07/4i + see fat tails,
kurtosis

Li


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

(financial) Lifecycle

See time horizon, long bias,
(narrow) framing, rotation

Living on a wheel?

Lifecycle is a concept in biology, and also in marketing and innovation (product
lifecycle
).

Usually, innovation have to break through some initial resistance (see status
quo bias, percolation).

If they succeed, they develop very fast, then stabilize, then decline.

Well, this is a bit simplistic, other "curves" are possible.

In demographical economics, the concept means that preferences (for
example between savings, borrowing, consuming) and attitudes (risk
attitude...) evolve with the age of people,as their time horizon (see that
phrase) changes.

Applied to saving / investing, this notion shows that people often
start too late to prepare for their old age financial situation
(short
term bias / narrow framing), although the opposite attitude might exists too
(long bias).

Liquidity

(Flight to) Liquidity

(Il-)liquidity / Liquidity crisis

Liquidity premium

Liquidity squeeze

Liquidity trap

Due to their lengths, those articles

are in a separate page
of this "I-L" glossary section

 

 

(market) Literacy

See culture

Lo - Ly


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

Logical fallacy

04/8i + see fallacy, cognitive bias,
manipulation

Long bias, longshot bias

03/1d,10d,11i + see persistence,
memory, time horizon

Long bias

The long bias is a preference for expected impressive performance in the
------
long run, without giving much attention to short term
prospects, at the difference of the short term bias (see time horizon).

Longshot bias

The longshot bias is a market anomaly / deviation that happens when
overpricing or underpricing goes on, or even increases, for months or
years
in a positive feedback spiral.

It is also a human behavior - as if people "never learn" or at least have
a short memory - to pursue a goal that can be considered already
overreached
.

It has thus a risk of backfiring,

Long tails

See rare events, extreme

Loss averse, aversion



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

of this "I-L" glossary section

Luck, luck puzzle, luck vs. skill



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

of this "I-L" glossary section

Lyapunov exponent

01/10i + see memory

The Lyapunov exponent measures small but continuous / cumulative
trajectory deviations
within supposedly random time-series of events.

Those divergences indicate for example if those events are affected by
long memory
.

See also Hurst coefficient.

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

Members of the BF Group, please
 vote on the glossary quality at
BF polls

separ

This page last update:  06/9/15  
Back to BEHAVIORAL-FINANCE GALLERY


  Disclaimer / Avertissement légal