Behavioral finance FAQ / Glossary (V-Z)
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Behavioral finance FAQ / Glossary (V-Z)
Val
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(asset, stock) Valuation
stock Value
Vi
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separate page
of this "V-Z" section of the Glossary
of this "V-Z" section of the Glossary
07/05d
Vo
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of this "V-Z" section of the Glossary
We
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03/2i + see house money effect
Burning money when feeling rich.
Definition:
The
wealth effect (or affluence effect) is the tendency of people
to spend
more than their income in bullish periods.
This is because they feel richer as long as the prices of stocks, real estate or other
assets
they own keep rising.
on the basis of the value of those assets to finance such spending.
They might discover later that asset markets become bearish. Sudden poverty effect?
Here the mental accounting (see that word) is reverted.
The Wealth effect considers all money as spendable, whatever the differences in volatility / safety.
Economic
consequences
Fine ...until it backfires.
Overspending (whether it is due to a wealth effect or to a lack of income) tends to boost the economy,
and sometimes to overheat it.
The artificial prosperity finds it limit when prices rise too blatantly above fundamental values
and create a bubble. It ends into a market crash.
Then many asset owners realize that they are
less rich than they thought,
that they could not afford to spend so much, that they accumulated too much debt or did not save enough.
Such a belt-squeezing can spread to many people and bring a general economic backlash.
03/2i + see frame
03/8i,12i + see also calendar effect.
Some studies has shown that markets are more bullish / optimist when there is good sunny weather.
Physiological feelings of pleasure or pain are factors that trigger related emotions such as optimism or pessimism.
Wil - Wis
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See rationality
02/8i - 03/1i + see overconfidence, optimism, magical thinking,
commitment, belief rationalization + bfdef2
Trusting a rosy vision?
Wishful thinking (or need to believe), a form of blind optimism
(see that word),
by which people prefer to interpret situations as leading to a pleasant outcome
and avoid to embrace the idea that less rosy realities are possible.
It is a common bias among human beings, that might come from
their aversion to the pain of
uncertainty.
It can be interpreted as a desire by people to feel good
and to avoid mental discomfort,
by considering that:
Things will come out right for them,
>More generally, there seems to be among humans, not only an aversion of uncertainty,
but also a
"need to believe" in happy endings.
It might give them a reassuring vision of the world, helping them to accept it better.
Dreams and reveries are good for your mind and your health,
but don't let them become traps!
Wishful thinking, a combination of optimism and cognitive dissonance, can be:
Faith / optimism might even be a good health factor.
investing
An example in investing is that, after investing in a stock with disappointing results, investors tend to find
good reasons (rationalization) that it will be a winner in the end, while neglecting the adverse aspects.
X - Z
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See fundamental, image
Yin-yang
asset valuation combines
It is more flexible than binary analysis (if one-sided researches or presentations can be called analysis).
yes / no answer, on the one cause-one effect analysis,
it rejects any alternative possibility.
It therefore tends to privilege only one type of factors / parameters when used for asset valuation.
* They do not just oppose / contradict each other,
* But also intermingle and balance / compensate / support each other in a dynamical way
(see range estimate aversion, fuzzy logic...).
(*) 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: 22/11/11 Back to BEHAVIORAL-FINANCE GALLERY
