Behavioral finance FAQ / Glossary (R)
Ra
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
Random, randomness
See distribution, random walk
separate page
of the "R" section of the Glossary
of the "R" section of the Glossary
of the "R" section of the Glossary
See rationality
See rational
08/3i + see ignorance,
cognitive overload,
(bounded / near) rationality
See bounded
of the "R" section of the Glossary
Rea - Rec
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
to info, news, events, signals
of the "R" section of the Glossary
anomalies / herding / boom
of the "R" section of the Glossary
01/10i,12i - 03/5i + see debiasing, tilting, stock image,
overreaction
Too rational, you said? Missing the human factor? That can be corrected!
For investors who are conscious of market biases,
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 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.
Practically it applies to:
, by adjusting it with market criteria,
for example with a tool such as the stock image coefficient.
, by taking into account
the underreaction - adjustment - overreaction phenomenon.
(see image, overreaction)
of the "R" section of the Glossary
Red - Reg
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
of the "R" section of the Glossary
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 some historical data (or other benchmark), often
a number, that an observer and /or player uses to
compare
the evolution and the current state of that system.
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 can sometimes be common to all observers as a common frame / starting point
from which some social / economic evolutions might be spotted
Whatever the general usefulness of an initial point,
from which to start an analysis or to react fast to a new situation,
there can be two possible snags:
, thus in need to be
adjusted to the new real situation,
To use systematically a reference point without digging deeper is a
(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).
of the "R" section of the Glossary
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
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.
of the "R" section of the Glossary
of the "R" section of the Glossary
Rep - Rev
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
01/4i, 11i + see persistence, memory
Do they never learn?
Financial markets are a good lab to study
The efficient market theory sustains that:
arbitrage.
That theory considers that such corrections / arbitrages would make those biases and mispricing
disappear quickly ...until the next blunders by the same players or by others 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 who have some knowledge in Behavioral finance tend to take it as
a justification that they are themselves unbiased, not recognizing their own flaws.
02/9i + see peer pressure, pride
See mindshare, availability heuristic, image
of the "R" section of the Glossary
See style of investing
(to the mean / to the other extreme)01/12i - 02/8i,10i,11i + see fat tails, distribution curve,
feedbac, extremes, gambler's fallacy
Regular or erratic pendulum?
In theory (efficient market hypothesis), markets self-correct their variation anomalies.
to the mean of the bell curve (see distribution curve).
the statistical mean
would be equivalent to the fair price (see that term).
Reversions
happen:
(when there is low volatility, any important unexpected event can change it to high volatility).
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) experience superior investment performances
under a process of:
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)
Ri -Rz
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
See risk
See
See
See
See narcissism
of the "R" section of the Glossary
03/11i + see magic numbers, range estimate aversion
03/9i + see epidemic, viral communication weak signal, percolation
01/9i,11i + Random walk hypothesis (see above)
(*) 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: 05/12/11 Back to BEHAVIORAL-FINANCE GALLERY
