Behavioral finance FAQ / Glossary (R)

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Ra

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

Random, randomness

See distribution, random walk

Random walk hypothesis / RWH



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

of the "R" glossary section

Range estimate aversion



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

of the "R" glossary section

(risk of) Rare events



Because of its length, this article

    is in a separate page

of the "R" glossary section

(Ir-) Rational, (Ir-) Rationality

 rationality

 

 

 

Rational bubble, expectations, bias

Rational choice theory

 

 rational
expectation

 

 

Rational ignorance

 

 

 

See 08/3i +  ignorance,
cognitive overload,
(bounded / near) rationality

(bounded) Rationality

(near) Rationality

 

 

 

 

bounded
rationality

(mental) Rationalization,
    rationalize



Because of its length, this article

   is in a separate page

of the "R" glossary section

Rea - Rec


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

Reaction / reactions

to info, news, events, signals


Because of its length, this article

   is in a separate page

of the "R" glossary section

Real estate market

anomalies / herding / boom


Because of its length, this article

    is in a separate page

of the "R" glossary section

Rebiasing

01/10i,12i - 03/5i + see debiasing,
tilting, stock image,
overreaction

Too rational, you said?
Overlooking the human factor?
This can be corrected!

For an investor who get conscious of market biases, who knows
how those collective fantasies can trap him, rebiasing is a useful
second phase after, guess what, ...debiasing.

Let us remind that debiasing (see the related article) is

to spot one's own biases and to adjust one's behavior accordingly,

in the financial area, to spot market biases and to adjust valuations
    in accordance.

When dealing with asset markets, rebiasing is
- while avoiding one's own biases -
to reintegrate anticipated market
biases
so as to take advantage of them. Like when judokas
use the weaknesses or mistakes of their opponents.

Practically it applies to:

Asset valuation , by adjusting it with market criteria,

for example with a tool such as the stock image coefficient.

Trend expectations , by taking into account

the underreaction - adjustment - overreaction phenomenon.

(see image, overreaction)

Recency bias, effect



Because of its length, this article

    is in a separate page

of the "R" glossary section

Red - Ref


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

Reductionism



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

of the "R" glossary section

Reference point, (mental) reference


See anchoring, loss aversion,
availability heuristic,
prospect theory

Lucky number? Or obsession?

Definition:

A mental reference point, in a dynamical system (for
example a financial market), is an historical data (or
another benchmark), often a number, that an
observer and /or player   compares to the
state and evolution of that system.

A behavioral bias is at play when he sees that
reference as
more relevant to take decisions
than the real situation and
prospects.


The reference can be as well

* a past data / event,

* as a theoretical one (model, standard, norm)

* or an anticipated one (a prevision, an objective)

Is it useful and adapted?

Running fast?
Or staying with the feet stuck to the floor?

Relying consciously or unconsciously on a mental reference helps to make fast
decisions.

Also that reference is sometimes common to all observers as a common
frame / starting point from which some social / economic evolutions might be
spotted

Whatever the general usefulness found in having in mind
an initial point,
from which to start an analysis or to react
fast to a new situation,there can be two possible snags:

That reference point can result from mental anchoring ,

thus needs to be adjusted to the new real situation,

To use systematically a reference point without digging deeper is

a reductive bias   (see availability heuristic, framing...).


In finance, the reference point, usually an asset price, is
a key parameter in anchoring, prospect theory, loss
aversion... (see those phrases).

Reflex, reflexive bias

Reflexivity, circularity


Because of their lengths,
    those articles
are in a
    separate page

of the "R" glossary section

Reg


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

Regime switching

04/2i + see percolation, technical
analysis, (Markovian) jump

Changing the rev. per minute
is Mozart music for motor fans.

A switch of regime (an analogy to what happens with a car speedbox) is, when
applied to asset markets, a crucial change of trend (and of investor
attitude / behavior)

The trend might thus:

switch from bullish / greed to bearish / fear.

or experience a strong and sudden acceleration or deceleration of the
   same trend.

Such switching can take the form of a strong discontinuity
(Markovian jump, non-linearity...), a break or even a gap.

=> It often takes place when the downtrend or uptrend crosses
     a "percolation threshold" (see that phrase).

The "dynamical system theory" calls a "phase transition point"
that tipping point where the switch takes place.

One of the thing that technical analysts do is to try to detect regime switching.
With mixed results.

(overconfidence in) Regulation



Because of its length, this article

    is in a separate page

of the "R" glossary section

Regret aversion / avoidance / minimization. Expected Regret


Because of its length, this article

    is in a separate page

of the "R" glossary section

Rep - Rev


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

Repetition errors / mistakes

01/4i, 11i + see persistence,
memory

Do they never learn?

Financial markets are a good lab to study repetition errors.

The efficient market theory sustains, without much evidence, that:

Market players correct their mistakes.

Or at least some players correct the market blunders of others, through
   
immediate arbitrage.

That theory considers that such corrections / arbitrages would make those
biases and mispricing disappear quickly ...until the next blunders by the same
or other players or appear, and so on.

This overlooks the fact that human behavior, however wise or biased,
repeats itself
(admittedly with some differences) as seen in the history of
mankind ...and in everyday life.

This misappropriate repetition happens because

* Logical reasoning is not always a dominant human

factor: fallacies, emotions or habits may override it,

* also, after some delay, the (collective) memory of

previous mistakes fades / decays.

For example, even investors whith some knowledge in Behavioral finance tend
to take it as a justification that they are themselves unbiased, not recognizing
their own flaws.

Representation,

Representativeness heuristic


Because of their lengths,
    those articles
are in a
    separate page

of the "R" glossary section

Reputation (of professionals)

02/9i + see peer pressure,
pride

Reputation (of stocks)

See mindshare, availability
heuristic, image

Resonance

See style of investing

Reversion / reverting / revert
(to the mean / to the other extreme)


01/12i - 02/8i,10i,11i + see
fat tails, distribution curve,

feedback, extremes,
gambler's fallacy

Regular or erratic pendulum?

Markets and reversions


In theory
(the so-called efficient market hypothesis), markets self-correct their
variation anomalies.

Prices are supposed to show a stabilization, or a reversion (also called 

regression) to the mean of the bell curve (see distribution curve).

Theoretically also, if we believe in long term efficiency (see that word), 
    the statistical mean would be equivalent to the fair price (see
    that term).

Reversions happen:

In prices and returns,

But also in volatility, and in risk perception

(when there is low volatility, any important unexpected event can change it
to high volatility).

In reality: to the mean or to the extremes?

Back to the center of the playground?
Or going off-limits on the other side?

The market works often differently.

Reversions makes sometimes "value investors" (see that phrase) obtain
superior investment performances under a process of:

reversion to the extremes

This takes place as follows:

1) A positive feedback loop / self-replicating epidemics (vicious circle),

exaggerates the amplitude and duration of the price trend,

2) Then prices reach an extreme low or high,

3) And then the trend reverts towards the opposite extreme (positive
    loop in the other direction)

Another thing that can happen is that a critical threshold is crossed,
there is a change of nature in the system (emergence, see that word),
then things have nearly no chance to revert to a past situation

Ri -Rz


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

(financial) Risk

(small) Risk

(Specific / systematic) Risk

See risk

 

 


 

Risk attitude, aversion, neutral,
   preference, profile, seeking, tolerance,

 

See

riskattitude

 


 

Risk perception

 

 

 

See

riskpercept


 

Risk premium,

Risk premia puzzle

 

 

 

See

riskpremium


Rogue trader

See narcissism

Rotation (of attention,
   interest, image)


Because of its length, this article

    is in a separate page

of the "R" glossary section

Round number anchoring

03/11i + see magic numbers,
range estimate aversion

Rumor dissemination


03/9i + see epidemic, viral c
ommunication, weak signal,
percolation

RWH

01/9i,11i + Random walk
hypothesis (see above)

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This page last update: 20/08/15
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