Behavioral finance FAQ / Glossary (I-L)
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
Rational ignorance is the practice to shun the quest for extra knowledge if it would
cost more than the benefits it would yield when applying it to decision making
See liquidity squeeze
separate page of this "I-L" section
of the Glossary
Im - Inc
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
of this "I-L" section of the Glossary
of this "I-L" section of the Glossary
See indecision, status quo bias, delaying tactics, default decision preference
of this "I-L" section of the Glossary
Ind
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
07/10i + See decision, delaying tactic, status quo bias, default solution preference
00/6i,8i - 02/8i + see distribution
.When minds glued together bend data randomness.
To have a pure random distribution in a statistical series of data.
the phenomena that are measured should be "independent".
This means that
(related to a common cause, or having a cause-effect relation...).
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 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.
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
of this "I-L" section of the Glossary
See hysteresis, delaying tactics, status quo bias
of the Glossary
08/12d + see automaticity, intuition, decision
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 some 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.
02/12i - 03/2d 04/4i - 04/5i 05/10i + see (fair / intrinsic / economic) value, extrinsic
See automaticity, instinct, decision
of this "I-L" section of the Glossary
01/8i,11i - 02/4i,7i,9i,10i - 03/10i;- 04/4i,5d,9i - 05,1i
+ see rational, rationality
Was it stupid?
(the related glossary articles detail those notions
and their
The words irrational / irrationality are obviously the opposite of rational / rationality
It relates to decisions that have all chance to be
damaging as going against one's interests or goals.
When an individual or collective move is performed, an irrationality can interfere,
Here a behavioral bias (see that phrase), which origin is cognitive or emotional, is at play.
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:
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
See calendar effect + 05/12i
See percolation, quantum leap, non linear, bifurcation.
Jumping beans in the market stall.
Sometimes, abrupt and important changes are seen in time series of statistical data,
for example
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:
accident / incident
(see rare event, small number)
which is
* Temporary, thus completely compatible with the system,
* And not really altering its random law.
It just shows, as it is a bit far from the other data, that the
statistical "distribution tail" is longer than seen in too
short time statistics or too small samples.
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 very 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 the peso problem anomaly).
It might change only marginally the bases of the
economic / financial system. Capitalism survives!
mutation of the system itself,
that leads to a totally new,
sometimes irreversible state
or situation, with emerging traits.
It is often due to a percolation (see that word)>
above a critical threshold.
Here, the quantum jump represents 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 an excessive use
of derivative markets, frenzied online trading or other
financial innovations).
K
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
See winner's curse.
01/9i + see information learning, paradigms, common conventions
memetics, (illusion of) knowledge
Knowledge, and its main components, information and learning (see those words), are
among the most powerful engine (in common with innovation) in today economies.
The problem is that individual as well as collective knowledge and information
are often biased
, as byproducts of cognitive and emotional biases.
Whence various flaws in knowledge acquisition (see learning).
See asymmetry
03/2i - 04/ 3i + see illusion, overconfidence
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 distribution
differs from a "normal" bell-shaped Gaussian curve.
It is found for example in
It shows how the dispersion of data from the mean is larger or shorter, flatter or more peaking,
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 be present at "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)
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
02/5i + see hysteresis
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 example "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.
02/5i + see hysteresis, rotation
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".
As a consequence, people might be "under influence" and not decide all the time on
their own free will or their independent analysis, even when they think so.
Well, it is normal that society has its own rights, and one of them
is to help individuals to 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.
On a more individual aspect, uncritical and overspecialized learning because of narrow social
frequentation might also create counterproductive habits, illusions of knowledge and cultural biases
that distort the analysis of phenomena as well as behaviors.
Such narrow learning might be obsolete knowledge or be unsuited to different situations or evolving ones.
07/4i + see fat tails, kurtosis
Li
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month,d: developed / discussed, i: incidental
See time horizon, long bias, (narrow) framing, rotation
Living on a wheel?
Lifecycle is a concept applied in biology, and also in marketing and innovation (product life cycle).
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
to prepare for their old age financial situation (short term bias / narrow framing),
although the opposite attitude might exists too (long bias).
of the Glossary
See culture
Lo - Ly
Dates of related message(s) in the Behavioral-Finance group (*):
Year / month, d: developed / discussed, i: incidental
04/8i + see fallacy, cognitive bias, manipulation
03/1d,10d,11i + see persistence, memory, time horizon
The long bias is a preference for expected impressive performance
------
without giving much attention to short term prospects, at the difference of the short term bias (see time horizon).
The longshot bias is a market anomaly / deviation that happens when overpricing or underpricing goes on,
or even increases, for months or years due to positive feedback.
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,
See rare events, extreme
of this "I-L" section of the Glossary
of this "I-L" section of the Glossary
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 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: 06/01/12 Back to BEHAVIORAL-FINANCE GALLERY
