Behavioral finance FAQ / Glossary (S)
Sa - Sc
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
Salience, saliency, salient
separate page>
of this "S" section of the Glossary
See utility, preference
See deception
00/9i,12i +see Bayes, tunnel vision, fuzzy logic,
range, expectation
Avoiding color blindness, the future has several possible hues.
When they try to foresee what might happen, people in most cases imagine just one
or maybe two possibilities (*).
They focus on what they expect (or wish, or fear) will happen or not, and forget to imagine
other possible occurrences (see range estimate aversion), in other words to build scenarios.
for example anchoring, framing, tunnel vision, availability heuristic.
A typical one is the "numeracy bias" (see that phrase), the belief that past statistics are religion,
thus not imagining the "black swan", the millenary storm, the rare / improbable event...
The art of prediction supposes on the contrary to imagine
a rather full range
of different scenarios,
fully or partly different of one another.
This helps
This practice is crucial for
asset market investors and financial analysts
when they estimate potential values (see value, expectation)
(*) They also often insist on getting a precise predicted number (see range estimate aversion)
00/9i,12i +see heuristic, paradigm, default of attention,
habit, representation, representativeness
Definition
A schemata is a predefined / structured arrangement of knowledge stored in the long memory
It is sometimes reduced to a simplified image or outline, as in the case of a stereotype for example.
Like a representation or an heuristic, it facilitates reactions and decisions, but it can lead to neglect to dig further.
See schemata
Sea - Self
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
04/3i, 06/2i + see calendar effect
See bandwagon effect, paradigm, cycles, rotation
See emergence, dynamical system, percolation
01/3i,5i,9i + see attribution, pride, self esteem, overconfidence
Out of self esteem, traders might attribute (see "attribution"):
This can reinforce overconfidence and narcissism instead of inciting them to adjust their behavior in next cases.
Of course for self-depreciating people, self attribution works in the reverse.
See overtrading, addiction, boredom, willpower,
Forgetting the map
and following whims
.
Definition:
The self control bias, is in fact the ...lack of self control and discipline. (for details see the "willpower" article)
It leads to act not according to one's reason / interest / main goals,
but according to one's impulses or feelings.
It might be a persistent - innate or learnt - personality trait.
But sometimes it is just "accidental", as a way to fight boredom and dullness or as the result of an intense emotion.
Effect of deficient self control on
Too fast, too slow...
Deficient self control is a factor in some investment errors (see objectives and precautions), such as, for example:
fast / short term performance
goals (see time horizon) and neglecting long term needs,
Overtrading, just on impulses,
without a sense of the right timing,
delaying stock selling
because of loss aversion or endowment effect.
01/8i + see pride, narcissism, self-illusion, self attribution
Self esteem (a form of pride) can lead to difficulties to recognize and correct one's errors,
which is a cause of irrational decisions.
See perverse effect
A self-defeating prophecy is a prediction that makes the people involved
have an opposite reaction / behavior, which makes the prediction wrong.
There is some relation with perverse effects / perverse incentives.
See illusion, magical thinking
02/8i + see rational expectations, cascades, feedback loop,
trend, reflexivity
See illusion
See attribution bias
Sell - Si
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
See endowment effect
00/10d + see skewness / asymmetry, volatility
Measuring just bumps or just dents?
Definition: semi-volatility is upside volatility or downside volatility (see volatility).
In
volatility has obviously two directions: up or down.
To measure those ups and downs separately is useful, as one side can be higher than the other (skew, asymmetry)
and each one has different consequences.
The
downside volatility can be considered as a more crucial measurement of risk (*) than full volatility .
The "Sortino ratio" measures the relation between return and downside volatility,
at the difference of the Sharpe ratio which measures return compared to full volatility.
In bull markets the upside volatility is often higher than in bear markets,
while in bear markets the downside volatility might be higher.
(*) Here we have to recall (see the risk article) that volatility is just a proxy for the average statistical risk,
but that markets are lands of uncertainty and extreme variations, which no mathematical indicator
can represent fully.
of this "S" section of the Glossary
See emotional bias, genetic utility
See glamour stock, fad / fashion
05/10i + see framing, time horizon
of this "S" section of the Glossary
04/4i,12i, 06/2i + see APT
Like some other stockmarket effects (PBR - P/B effect, PER - P/E effect),
the size effect is a well known
market anomaly.
It takes the form of a stock price premium (or price discount) due to an ancillary benchmark,
in this case the company size.
Stocks of big companies are usually overpriced if
compared to small ones that offer similar economic prospects.
Their prices include a premium over the small fishes,
which are thus quoted at a discount.
There are of course exceptions, as is the case for very specific small companies with high prospects,
which enjoy on the contrary a rarity premium.
The size effect could be due to:
A better notoriety and more abundant information from those corporations.
major stock index.
This leads investment funds which strategy is to match the index evolution to hold them in their portfolio.
for example the feeling that there is safety in mere size.
Sk - So
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
00/8i,10i - 01/2i,3i,9i + 02/1i,11i - 03/i - 04/2i - 08/1i
+ see asymmetry, semi-volatility
03/1i + see (short) memory, gambler's fallacy, numeracy bias,
representativeness, rare events
The "law" of small numbers - also called the law of small samples - is a statistical bias,
the practice to infer probabilities from
* A too small series of data,
* Or data that represent a too
not ready for either dramatic opportunities or ruinous occurrences.
This statistical bias can mislead many investors who tend to infer the probabilities of future returns
(price rises or falls) from a small period of recent historical data.
of this "S" section of the Glossary
00/9i - 03/12i + see non linear + bfdef3
Soft computing refers to any kind of "non linear" computing tools based on:
Chaos theory, fractals, fuzzy logic, neural nets, genetic algorithms, artificial intelligence, machine learning...
In economics and finance, they are used to complement what is missed by
too clear cut mathematical models such as the CAPM.
Sp
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidenta
See risk, CAPM
of this "S" section of the Glossary
See manipulation, hype, pump and dump
04/1i + dynamical system, agent based model, percolation, power law
Cocktail shaker in a financial bar?
The spin glass model is an agent-based mathematical model that simulates the
It is derived from an analogy to raising temperature in a spin glass.
It starts with a phase of random reactions, that fits the Gaussian randomness laws.
But when a critical temperature is reached another phase occurs, which can obey
a mathematical power law, or which can even become fully chaotic without any order.
This is a phenomenon rather similar to percolation and typical of some dynamical systems,
such as the evolution of prices and returns in a stock market.
But it is far from sure that such a model can predict them.
See image types, salience
Spotlight stocks are stocks that
(or apparently favorable news as it can be just spin)
This could result in overpricing (puffed image).
Sta - Sti
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
03/8i + see EMH, behavioral finance
Financial dress code?
The "standard finance" phrase refers usually nowadays to the set of financial paradigms, notions and models
that are based on the EMH / Efficient market hypothesis.
This appellation distinguishes it from "behavioral finance" which finds some inconsistencies in those notions and
focuses its quest on "market anomalies", as phenomena that do not obey fully those standard laws.
of this "S" section of the Glossary
09/3i + see economic man, trophy seeking
See representativeness heuristic, fuzzy logic, type, schemata, selective
A stereotype is an abusive categorization of various things, people or phenomena under the same label,
a type of representativeness heuristic (see that phrase).
See underreaction, hysteresis, persistence, cluster, reflexivity, anchoring
Sto - Sty
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
01/4i - 08/5i + see quants, distribution, probability, model
Is the future a mathematical probability?
Based on past statistics?
Definition:
Stochastics / stochastic calculation is a branch of mathematics used for statistical analysis
of
random dynamic processes.
It focuses on detecting random evolutions in time-distribution (see distribution) and on using those findings
to give related previsions by applying laws of probabilities.
As prevision tools, stochastics, historic probabilities and classical random statistical distribution laws.
and ...save the effort to make scenarios.
when uncertainty overrides probabilistic risk.
Trusting random prices? Or expecting uncertain returns?
In asset markets, stochastic calculation is often applied to the evolution of prices, returns, volatilities.
This practice is linked to the standard theories (RWH, EMH, see those acronyms) that consider that
those market evolutions obey randomness laws.
Those calculations can be trusted only to some degree, as those markets are driven not only
by randomness, but also, as most dynamical systems (see that phrase), by uncertainty.
For example, past volatility, largely used by financial stochasticians, is just a proxy for future risk.
Therefore it should be taken with precautions when making financial projections.
See image coefficient
04/12i + see profile
of this "S" section of the Glossary
02/8i + see style + see stock management
An investment strategy is a way of investing based on a precise set of actions that tries
* to fit the the opportunities, challenges and evolution of a situation,
* so as to meet a goal (usually an optimum safety / return balance).
It can derive from a style of investing (see below) except that styles are more permanent and ingrained
in the investor's psyche.
See status quo bias, commitment, anchoring
See (ir-) rationality
of this "S" section of the Glossary
Su
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
See bubble and crash
08/6i,7i + See commitment, loss-aversion
Nostalgia for money sunk in history
Better not look back!
The sunk cost fallacy is to focus on past costs to decide future spending.
Why to call it a fallacy ? Because it goes against the simple idea that:
The only criterion to justify to add a
lump of money
should be that that lump would be profitable by itself.
If not, why spend more?
This bias is somewhat linked to loss aversion and to the commitment effect (see those phrases).
even if the future is foggy, and therefore taking the risk to lose more.
The flawed idea is not to lose a portion of what has been already invested, even if
that portion is ...already
lost and it is not realistic that it can be recovered
("get even bias /get-eventis", see that phrase).
For example to drive more and spend more petrol just to "recoup" the buying price of a car is not too rational.
of this "S" section of the Glossary
See (reaction to) information, expectation, disappointment,
unintended consequence, uncertainty
Unexpected money flow or money leak.
In financial markets, a surprise
is an unexpected information / event / announcement / signal,
which can have an (immediate or delayed) impact on market prices, returns, volatility...
Earning surprises are a classic in this field, being an earnings announcement that differs
from what the analyst consensus expected.
Negative earnings surprises (earnings which are below those expected, even if they are growing) usually
have more impact on prices than good ones.
People are more affected by disappointment
than by better than expected outcomes.
Efficient surprise?
According to the EMH, only unexpected information that are relevant enough
to change economic risks and return prospects, and which normally happen randomly,
can bring market price moves.
But in real market life, various phenomena, such as noise trading (see that phrase),
may make market evolutions partly independent of such external events.
The microcosm sometimes ignores the macrocosm and lives its own life.
Another thing is that when, in a bull market, good news / surprises do not make price rise
any more, it might signal that the uptrend is over and when, in a bear market, bad news
do not lead to new price falls, the downtrend might be over.
02/9i 06/4i + see evolutionary psychology, overconfidence,
hindsight bias, overconfidence, luck
They are still alive, they must be smart!
The survivor bias is the idea that the recurrent
There is a kind of hindsight bias or rationalization in this.
This kind of thinking can lead to wrong heuristic decisions or to overconfidence, as it does not take into account:
and left the playing field.
Anyway, it can be also that the players who developed a "survival instinct",
by being adaptable to all situations, have better chances to survive in the game (see evolution).
Sw - Sy
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
See herding
See dynamical
of this "S" section of the Glossary
03/5i + see collective bias
(not to be confused with "systemic" risk) See risk, CAPM
See liquidity, crash, rare event, model, epidemic, contagion, domino effect
(not to be confused with "systematic" risk)
If one has a cold, the others can get the flu!
If you fall, we all fall!
Definition
In
liquidity crisis
(see that phrase) that extends to the
whole financial system.
That contagion
:
fear and distrust that might ends in general panic.
Such a crisis can take the form of:
(the visible symptom is that prices collapse or skyrocket)
(and even a tendency by them to withdraw money).
Systemic crises are
"rare events" (see that phrase).
Their occurrences and impacts are rarely predicted by economic and financial mathematical models
because such phenomena might not appear in too short statistics (and because of some collective
over-optimism and overconfidence that hide them).
Some examples of systemic or nearly systemic crises are given in the glossary articles
about liquidity, crash, and even ...real estate.
(*) 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: 21/01/12 Back to BEHAVIORAL-FINANCE GALLERY
