Behavioral finance FAQ / Glossary (P-Q)

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P - Pan


Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

Pain (and pleasure)

See emotion, neuroscience,
greed and fear, loss aversion

Investors driven by pain or pleasure,
and sometimes by reason.

Definition and effect

Current - or expected - pain and pleasure
are basic feelings
which are present in most emotions
(see emotion).

As neuroscience (see that word) research found, the brain
areas, chemical secretions
and electric waves related to pain
or pleasure play a part in human mental processes, in decision
making and in behaviors.


  They tend - notably when risks are at stake (the
       case for
example in economics and finance) - to override

      brain sectors or connections related to cognition and

         rational thinking.

Money, and pain / pleasure


Pleasure seeking and pain avoiding is expressed in

investment  and trading by

by " greed and fear" (or hope and fear),
and
also by social emotions leading to mimicry and
herding

A typical example in which pain-avoiding leads to irrational investing is the
  
"loss aversion" (keeping an asset on which we are losing money, 

 whatever its prospects).

A more mundane example is about the attitude related to spending: some

people find it painful to spend and others painful to save.

To train mentally to some indifference to pain and pleasure (and as a
result to greed and fear) seems to help make dispassionate money decisions
and to keep some discipline (see that word).

Panic



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

         of this "PQ" glossary section

Par - Pb

Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

Paradigm


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

         of this "PQ" glossary section

(decision) Paradoxes

See microeconomics paradoxes,
game theory + probabilities link

Paralysis

See hysteresis, delaying tactics,
status quo bias

Passive investing / management



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

         of this "PQ" glossary section

PBR (P/B) effect

See PER effect, size effect

Jewels in the books?

Definition:

The PBR or P/B of a stock is an acronym or its "price to book ratio".

PBR = Market Price / net assets per share.

In other words it measures how much the market pays for those
corporate assets (less the corporate debts) according to their
accountig value
.

The PBR "effect"

When prices climb on the book.


Although it is not the main criterion, the book value seems to play a part
in stock prices.

This book value can be one of the factors that make those prices
rise above or fall  under the standard value calculations that focus
on earnings or dividend prospects.

As if investors were interested not only in the business future,
but also in the treasures in the company's vault.

This does not fit the standard theory. Investing on the basis of the P/B goes
against
the "efficient" evaluation paradigm that assumes that prices just
depend of future returns and risks.

It is therefore called an "effect", an understatement for "price or return
    anomaly".

The PBR effect is usually listed in the same category of "anomalous"
pricing parameters than the "PER (P/E) effect" or the "size effect".

Is this effect rational?

Obsessed by the treasure chest?

We saw above that investing on the basis of the P/B goes against the
"efficient" evaluation paradigm.

But the P/B effect is not completely irrational if we use a
broader view.
It is in some cases justified by taking into

account that :

A firm with plenty of marketable assets can recover money in
    case of problem by selling some of them ("family jewels").

Takeover bids, that would boost the stock price, can be motivated
    by the  value of those saleable assets.

Sometimes the true value can lie in "hidden jewels" not accounted
for in the books.

Pe - Per


Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

Peer influence / pressure / conformity / fear


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

      of this "P-Q" glossary section

P/E (PER) effect



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

      of this "P-Q" glossary section

Perceived risk, risk perception



Due to its length, this article is

in a separate page
of this "PQ" glossary section

Perception



Due to its length, this article is

in a separate page
of this "PQ" glossary section 

Percolate, Percolating, percolation threshold


Due to its length, this article is

in a separate page
of this "P-Q" glossary section

Persistence
(in fractals / trends / biases / volatility)




00/6d - 01/3i,8i,10i,11i -
03/10i  + see Hurst
coefficient,
Lyapunov
exponent, trend, diffusion,
percolation, longshot bias,
long memory

Still going strong?

Usually (see diffusion, percolation) any dynamic phenomenon (a growth
or a decline
for example) can evolve as follows:

It has a good chance to persist, or even to snowball, once it goes above 

a critical point / threshold (for example a number of buyers for a new
product).

But, if it stays for too long under that point, it is not certain to persist.

It can even abort and disappear completely (anti-persistence, negative
persistence
).

The Hurst coefficient helps to measure persistence in a series of historical
data.

Trend persistence in asset markets

As concern stock market trends, they can, after a given
period (for example over 1 year),
be considered as having "settled in".

In other words a long established trend seems to have a higher
probabilityin the next period, to persist than to revert.

The delayed reversion will happen only when it reaches the next
critical point
.

Between take off and landing, market trends are often on autopilot.

Also, usually, upwards trends seem to persist longer than downward
trends.

(money, investment) Personality

03/9d + see psychology,
style, profiling + eprofile

Know thyself!

Various works (psychographic) by psychologists have tried to classify
money styles / personalities according to various behavioral traits, such as

Their preference between spending and saving,

often linked to their time horizon (see that phrase),

Their risk profile (degree of aversion to risk),

Their ethical preferences,

Etc. (see "style" for more details).

To detect those traits could help:

In individual behavior counseling,
   including financial strategy counseling.

In self-analysis and understanding
   one's own goals and practice
s.

As marketing segmentation tools
   for banks and money managing firms

In a better understanding of the effects
   of the various classes of investors on
   financial markets,
in order for example
   to build "agent-based" (see that phrase)

investment models.


Perverse effect, incentive



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

       of the "P-Q" glossary section

Pes - Pri


Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

Peso problem anomaly

00/8i + see rare events
+ probabilities

The peso problem refers to a market anomaly, for example a sudden price
fall, which is infrequent
(rare event, fat tails, extreme occurrence)
but that leads to extreme consequences that can be disastrous.

Pessimism

see emotion, greed &
fear, optimism

Pessimism (gloom) can have rational basis (perceived risk)
but can be emotionally linked to excessive fear.

Phase transition

04/1i + see percolation

(market) Play, Player, Playing

See game playing, game
theory, agent-based model,

Pleasure (and pain)

See pain and pleasure

Ponzi scheme

See pyramidal scheme

(market) Positioning

See profile

Power law

03/4i + see distribution

Precision bias

See range estimate aversion

(economic) Preferences interactions, reversal, (in)transitivity


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

       of the "P-Q" glossary section

(equity, risk) Premium

See risk premium

(psychological) Pressure


See conformity, peer influence,
groupthink, herding, mania,
hysteria

(bid, psychological) Price

(fair) Price

Price anomaly

Price information

(Asset) pricing

Due to their lengths, those articles

     are in a separate page

of this "P-Q" glossary section

 

 

Price-earnings ratio, price to book ratio

See P/E effect, P/B effect

Pride

See self esteem, commitment,
rationalization, attribution,

status quo bias, narcissism

Too proud to think. Too proud to change.

Pride is not a (noxious) bias in itself. It can lead to impressive feats.

But it becomes a bias when it leads to a primacy of the ego
(see narcissism), which overrides a sound appreciation of
situations
.

It is one of the main causes of stubbornness, that leads for example, in
corporate management or in investing, to maintain blindly a losing
strategy (see loss aversion).

Many investors stick stubbornly to their initial decisions /
commitments
(see that word).

They usually try to find rational reasons and attributions to justify
this, even if new facts and events show them they are mistaken,
as their ego cannot stand the pain to be wrong.

Pride accelerators


Extreme forms
of pride
happen when that feeling is combined:

Either with overconfidence, arrogance and presumption and it
   becomes hubris and narcissism (see those words),

Or on the contrary with an inferiority complex,

It translates into a form of frustration or envy that makes the person
try to take inconsiderate risk or create huge damage, just to prove to
itself or to others that it is not an underling i(nverted narcissism).

Those extreme cases seem to be frequent among "power people", which
can explain strange decisions by business and political leaders.

It seems for example to be one of the motivation behind many mergers
and acquisitions. This can explain why a good proportion of them are failure.

Primacy / priming effect

See anchoring,
(availability) heuristic

Remember it, my boy,
you will not give again a good first impression.

The primacy / priming effect relates to

  the first idea, fact, perception or representation

that comes to mind about an issue, an event or an information.

It can instantly and unconsciously become a cognitive or affective anchor
that excludes other references when dealing with the issue

It is a form of availability heuristic (see heuristic)

Principal- agent theory

02/,8i ,11i + see agent, ethical,
perverse incentive, moral hazard

Pro


Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

Probability / Probabilities (objective, subjective, conditional)


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

      of this "P-Q" glossary section

Procrastination

See status quo bias, delaying tactic,
underreaction

Profile / Profiling 1 (stock types)

Profile / Profiling 2 (investors types)


Due to its length, this article
      is in a
separate page
      of this "P-Q" glossary section

Projection bias

See attribution

Their eyes are not my eyes

Definition:

In psychology, the projection bias, something related to the attribution bias,
is the illusion  we might have that other people think - and thus will act or
react - the same way than we do.

It is also called the false consensus bias,
the idea that everybody see things like we do
.

This self-centered bias consists also in attributing to others our own
motivations
,
including ...our unconscious biases.


Precautions
.

In that respect, beware of some biased advisers and sellers!

Instead of understanding your real needs and motivations, and
to analyze rationally what could fit your true interest, they tend
to attribute to you their own preferences and to orientate your
decisions accordingly.

Propaganda

00/12i + see disinformation,
manipulation

Prospect theory



  Due to its length, this article is
      in a  
separate page
      of this "P-Q" glossary section

  See also the general "aversion" article to see the relations
       
between  risk aversion, prospect theory, loss aversion,
        regret aversion, disposition effect...

Prototype

See profiling, type

A prototype is an elaborate example of a given category (of stocks, of
investors, for ex.)
that is still in the making and could gain importance in
the future.

Prototype is often used to describe a new man-made phenomenon
or design while archetype refers to old examples, real or invented.

Both are found in finance:
old categorizations as well as new paradigms.

The risk is to go from archetype and prototype to stereotype
(abusive categorization): see that word.

Proximity bias

See home bias

Ps - Py


Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

Pseudo-certainty, pseudo-instinct

See belief, automaticity

This is a mental certainty that is not based on a conscious rational approach,

It can be a brilliant intuition, a smart subconscious neural analysis,
but it has also some chance of being an illusion (see that word).

Psychology (of investing, markets, money...)

(economic, financial) Psychology

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

      of this "P-Q" glossary section

Psychosociology / Psycho-sociology

See social psychology

Public behavioral finance / economics

See behavioral public
economics / finance,
public choice,
agent-principal

Public choice / public policy bias



04/9i - 05/1i + see incentives,
behavioral public
economics /
finance, agent-principal,
social mood

Caveat voters!

Public choice encompasses decisions made either by voters or in the name
of voters
(= by public administrations), specifically in economic
matters.

Such collective decisions are often proposed or seen as an antidote to
some misallocations of resources due to market anomalies.

But those public corrections or "voluntary" public reorientations
have their own biases
.

They can create their own direct anomalies, hurdles and failures and/or
bring indirect disincentives (see perverse effects).

One trait is the "majority cycle" (or voter pendulum).

It can bring extreme effects in one direction or the other, causing
legal and
social instabilities, something akin to excessive volatility.

Of course, political coalitions that try to represent a larger share
of the population than just one side or the other, can be instable
also, but become necessary when everything else failed.

Another aspect is optimistic / pessimistic "waves" in social mood.

We can label "behavioral public choice" the behavioral economics subfield
dealing with those phenomena.

Even if public schemes have their deficiencies, some BE/BF specialists
propose "libertarian paternalism" to avoid biases in financial decisions when
totally left to the individuals, for example about investing for retirement..

Pump and dump

03/7i + 06i + see deception,
manipulation, ethics

Village pump, that takes more water than it gives.

Pump and dump is a form of  manipulation of information about a
stock (or another traded asset).

The manipulators create a spin (pump) around the stock (often a "penny

stock") of a company which usually is a dead horse and in which they
have or took a vested interest.

Then they sell them (dump) at a good price, thanks to the buying frenzy
   
fostered by the hype.

That scam might be launched via traditional media, via newsletters, via internet
spam, via advisers, via word of mouth (see viral communication)...

Also, a first buy for the pumper, by which he stuffs its bag with
some assets, to create the impression that an upward momentum has started.
and which he will sell then to take his profit.

It might also take place through recommendations from a sell-side analysts
whose bank has at the same time corporate financing activities for the
company that issued the stock.

In other words, in that last case, the celebrated "China wall" between both
activities has a hole.

Pyramidal scheme

See greater fool delusion,
deception

Suckers at ground level, crooks at the top.

A pyramidal scheme / Ponzi's scheme is a scam that creates a "make big
money fast" belief and is built as an intentional bubble-like phenomenon.

It uses the mechanics of baiting an ever increasing number of
new entrants
into subscribing or buying a financial asset, with the promise
of spectacular incomes or gains
.

Actually, a portion of the fresh money they bring

     will pay the revenues and withdrawal of the previous
     "investors" and the remaining cash is siphoned into the
     scammers' pockets.


It gives the illusion of working beautifully, making a lot of money for the
investors ... until the scheme collapse when there are no more enough new
sheep to flee.

All those who get stuck in the trap lose the money they put in the scammers'
hands.

The recently discovered "Madoff scheme", which drowned 60 billion
US dollars and persisted for 17 years, have broken all records in the
category.

But smaller and more local ones are getting born regularly like daisies
in the meadow in springtime.

Q


Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

QA

See quantitative analysis

Quality premium

04/4i

Quant

Quant fund

Quantitative analysis / QA

Quantitative behavioral finance

Quantitative investment

Quantum lump, jump

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

      of this "P-Q" glossary section

 


 

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This page last update: 05/09/15
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