3. Stock image levels and factors

After looking at the economic value of a stock, now it is time to salt and pepper it

with the behavioral elements.

This is the role of the image coefficient

Image coefficients may range between 0.2 to 3 (if we prune exceptional cases!).

The average historical image for the whole market

(taking a largely diversified stock index as a reference) is 1.

The image bracket is specific to each stock:

It is more or less broad and high according to the type of stocks

and to the market climate variations.

See the image tables directly if you want to skip the explanations below.

We can split the image in two components:

Technical market factors (i.e. market liquidity aspects),

Above all, individual and collective behavioral biases

Cognitive biases : attention anomalies, anchoring...

Even more crucial, individual sentiments, and collective market mood, when they are biased

(fear, greed, herd instinct ...to quote only a few phobias, phantasms and psychosomatic rashes).

These operators' attitudes and sentiments, and the resulting behaviors, are quite diverse, changing

and they differ from one stock to another.

Thus, specific pages in the site and a discussion group / list are dedicated to

these behavioral finance topics

We lack room here also to develop the Finance Theory's famous duettists:

"Risk premium", an extra return to cover risk aversion, "Beta coefficient", a parameter based on the stock return's volatility, and by extension, its price volatility, in itself a form of risk, and on its correlation to the general market volatility. If a stock has a beta (called also "elasticity") of 1.2, its price is suppose to fall or rise by 12% if the market rises or falls by 10% For specialists: is there some relation between the image and the beta coefficient? Click on the link.

These tools are directly linked to the good old concepts of

'utility / risk aversion / risk/ rewards optimization".

The problem is that, as behavioral finance shows, these so called rational concepts

suffer "cognitive" and "affective" distortions and variations.

Thus they are far from being the only engine of market behavior.

Therefore I imagined a concept that seems to me, even it may look immodest,

more exhaustive and more descriptive of market realities: the image coefficient.

his leads to a valuation model in which I include:

In the interest rates used to compute the primary PER: a portion of the risk premium (portion I call the "structural systematic premium"). It is a constant, common to all stocks. It measures the whole stock market's average historical risk aversion. In the image, as a factor among others: the remaining portion of the risk premium. This part 1) changes with time and 2) differs from one stock to the other.

As for the beta coefficient, it intervenes indirectly in the width of the image coefficient brackets.