Behavioral finance FAQ / Glossary (S)

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Sa - Sc


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

Salience, saliency, salient



Due to its length, this article
    is in separate page

of this "S" glossary section

(economic, financial) Satisfaction

See utility, preference

(financial) Scam

See deception

(method of) Scenarios

00/9i,12i + see Bayes, tunnel
vision, fuzzy logic,
range,
expectation

Avoiding color blindness,
the future has several possible hues.

Antidote to focusing / tunnel vision


When they try to foresee what might happen, people in most cases imagine just
one or maybe two possibilities / scenarios about a future situation (*).

Same thing when they have a problem to solve problems, they lack "lateral

thinking" to esplore various factors and solution.

They focus on what they expect (or wish, or fear) will happen or not.

This narrow approach tends to prevent them usually to imagine a full variety
of other
possible occurrences
(see range estimate aversion), in other words
to build scenarios.

This mental limitation can be explained by various cognitive biases,
   for example anchoring, framing, tunnel vision, availability heuristic,
    selective attention
(see those words)

A typical one is the "numeracy bias" (see that phrase), which is seeing
past statistics as infallible, 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.

Scenarios as analysis and decision tools

To identify possible scenarios helps to

apply "gradual" decision-making tools such as fuzzy logic or Bayesian
   probabilities (see those phrases)

get ready thus to adjust one's action to the various possible occurrences.

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)

Schema, Schemata




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 can be elaborate, or sometimes reduced to a simplified image or outline, a
stereotype let us say.

Like a representation or an heuristic,

* this ready-made representation facilitates reactions and decisions,
* but it can lead to neglect to dig further.

Script

See schemata

Sea - Self


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

Seasonal anomaly, Seasonality

04/3i, 06/2i + see
calendar effect

(economic) Sector / concept fad

See bandwagon effect,
paradigm, cycles, rotation

Selection bias

Selective attention/ exposure/ memory/ perception / reporting

Selectivity bias

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

of this "S" glossary section.

Self adaptation, self organization

See emergence, dynamical
system, percolation

Self attribution

01/3i,5i,9i + see attribution,
pride, self esteem,
overconfidence

Out of self esteem, traders might attribute (see "attribution"):

Their successes  => to their own skills. This is the "self attribution bias"

Their failures      => to outside influences / to other people, that they did
   
not see how to predict or protect against.

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 way.

Self control bias, self discipline bias

See overtrading, addiction,
boredom, willpower,

Forgetting the map
and following our
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 accordingly to one's reason / interest / main goals,
but accordingly 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 investors

Too fast, too slow...

Deficient self control is a factor in some investment errors (see objectives
and precautions), such as, for example:

Focusing on fast / short term performance

goals (see time horizon) and neglecting long term needs,

Overtrading, just on impulses, without a

              sense of the right timing,

Or, on the contrary, delaying stock selling

because of loss aversion or endowment effect.

Self esteem

01/8i + see pride, narcissism,
self-illusion, self attribution

Self esteem (or self-love, as Adam Smith called it) is a form of pride.
It can lead to positive decisions.

But if it goes too far, it can make difficult to recognize and correct one's
errors,
which leads to irrational decisions.

Self-defeating prophecy

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.

Self-delusion

See illusion, magical thinking

Self-fulfilling prophecy


02/8i + see rational expectations,
cascades, feedback loop,
trend,
reflexivity

Self-illusion

See illusion

Self-serving bias

See attribution bias

Sell - Si


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

Selling aversion

See endowment effect

Semi-volatility

00/10d + see skewness /
asymmetry, volatility

Measuring just bumps or just dents?

Definition

Semi-volatility is upside volatility or downside volatility (see volatility).

In financial markets, return or price volatility has obviously two
directions: up or down, you guessed it.

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.

Downside volatility

The downside volatility can be seen 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.

(market / investors) Sentiment



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

of this "S" glossary section

Sexual urge

See emotional bias, genetic utility

Shooting star

See glamour stock, fad / fashion

Short term bias

05/10i + see framing, time horizon

Signal, signaling



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

of this "S" glossry section

Size anomaly / effect

04/4i,12i, 06/2i + see APT

Is bigger better?

Definition

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) based on 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.

Does this effect have rational causes?

The size effect could be caused by:

A better notoriety and more abundant information from those
    corporations.

A better market liquidity for their stocks.

The fact that a big company has more chance to be included in a
    
major stock index.

This leads investment funds which strategy is to match the index evolution
to hold them in their portfolio.

But also to some component of the behavioral "image" (see that word),

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

Skew, skewness / Asymmetry


00/8i,10i - 01/2i,3i,9i + 02/1i,11i
- 03/i - 04/2i - 08/1i
+ see
asymmetry, semi-volatility

Small numbers (law of)


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, as the practice to infer probabilities from

* A too small series of data,

* Or data that represent a too short (usually too recent) period.

This is often misleading as it can not only give a wrong estimate of 
     the true probabilities but also hide
rare events (see that phrase) and
     thus
makes the deciders not ready for such 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.

Social, social anomaly / behavior / bias / cognition / effect (general definition)

Social behavior / effect / influence (on finance / economics)

Social learning curve

Social psychology

Social representation

Social responsibility

Social utility

Socioeconomics, economic sociology

Sociopsychology

Due to their length, those articles

       are in a separate page  

of this "S" glossary section

 

 

 


 

 

 


Soft computing

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: incidental

Specific risk

See risk, CAPM

(financial) Speculation



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

of this "S" glossary section

Spin

See manipulation, hype,
pump and dump

Spin glass model


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 market behavior.

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 as 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.

Spotlight stocks

See image types, salience

Spotlight stocks are stocks that

benefit at the moment from an avalanche of favorable news

(or apparently favorable news as it can be just spin)

are much talked about favorably.

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

Standard finance

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.

Status quo bias



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

of this "S" glossary section

Status seeking

09/3i + see economic man,
trophy seeking

Stereotype


See representativeness heuristic,
type, schemata, selective,
fuzzy logic

A stereotype is an abusive categorization of various things, people or
phenomena under the same label,

thus a near-synonym  of representativeness heuristic (see that phrase).

Sticky (price) stickiness


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

Stochastics, stochastic calculation

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 probability
laws.

As prevision tools, stochastics, historic probabilities and classical random
statistical distribution laws:

Are quite useful at avoiding some illusions (see "base rate neglect"

or "gambler's fallacy") and ...saving the effort to make scenarios.

But are a poor/ limited substitute - let us say an heuristic (see that
   word) - to such scenarios when uncertainty overrides probabilistic risk.

Stochastic and asset market projections

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.

Thus it should be taken with precautions when making financial projections.

Stock image

See image coefficient

Stock profile / profiling / type

04/12i + see profile

(good) Story, Storytelling



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

of this "S" glossary section

(investment) Strategy

02/8i + see style
+ see stock management

An investment strategy is a way of investing based on a precise / thoroughly
prepared set of actions that tries

* to fit the the opportunities, challenges and evolutions of a situation,

* in order 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
ingrained and permanent in the investor's psyche.

Stubborn, Stubbornness

See status quo bias,
commitment, anchoring

Stupid, Stupidity

See (ir-) rationality

Style of investing, trading



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

of this "S" glossary section

Sub - Sup


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

Subprime crisis

See bubble and crash

Sunk-cost fallacy

08/6i,7i + See commitment,
loss-aversion

Nostalgia for money sunk in history

Better not look back!

Definition

The sunk cost fallacy is to focus on past costs to decide additional 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 lump to be profitable by itself.
If not, why spend a kopeck more?

This bias is somewhat linked to loss aversion and to the commitment effect (see
those phrases).

Here are some cases

The temptation, after spending money and efforts in something that turned
   bad,
to go on investing, even if the future is foggy, and therefore taking the
   risk to lose more.

The flawed idea is not to lose a portion of the prior investments, 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).

The accounting confusion between fixed costs and variable costs.

For example to drive more and spend more petrol just to "recoup" the
buying price of a car is not too rational.

In finance, cost averaging (see that phrase)

Superstition



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

of this "S" glossary section

Sur


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

Surprise



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

Earning surprises are a classic in this field, as an earnings announcements that
differ 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
.

Market surprise and market efficiency

Efficient surprise?


According to the EMH, only unexpected information (if they are relevant enough
to change economic risks and return prospects), which normally happen randomly,
canbring 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.

Survivor bias, survival


02/9i 06/4i + see evolutionary
psychology, luck, overconfidence,

hindsight bias, overconfidence.

They are still alive, they must be smart!

The survivor bias is the idea that a recurrent winner won
because of superior skill and strategy.

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::

The part played by luck in success

The fact that some non-survivors might have used also the same skills and

strategy but did not succeed 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

Swarming

See herding

(dynamical / complex) System

See dynamical

System trading



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

of this "S" glossary section

Systematic bias

03/5i + see collective bias

Systematic risk

(not to be confused with
"systemic" risk)
See risk,
CAPM

Systemic crisis / risk

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 finance,
a systemic crisis is an exceptional liquidity crisis

(see that phrase) that extends to the whole
financial system
.

Why and how it happens

That contagion :

Obey mechanical reasons (domino theory), because financial institutions
   have cross interests,

Can also be boosted by a general atmosphere of fear and distrust
   that might end in general panic.


Such a crisis can take two forms, lack of assets or lack of cash  :

A lack of counterpart for buyers or sellers in some asset markets

(the visible symptom is that prices collapse or skyrocket)

Or a lack of depositors or subscribers in banks, funds or other financial

institutions (and even a tendency by them to withdraw money).

Why its possibility is often neglected

Systemic crises are "rare events" (see that phrase).

Some examples of systemic or nearly systemic crises are given in the glossary
articles about liquidity, crash, and even ...real estate.

Their occurrences and impacts are rarely predicted by mathematical economic
and financial models because such phenomena might not appear in too short
statistics
(and because of some collective over-optimism and overconfidence
that hide them).

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

Members of the Behavioral Finance Group,
 please vote on the glossary quality at
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 This page last update: 09/08/15  

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