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
What are the average and
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
stocks and to the market climate variations.
See the image tables directly if you want to skip the
What factors act upon the image levels?
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
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
Are there relations with
We lack room here also to develop the Finance Theory's
"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 supposed to fall or rise by 12% if the market rises
or falls by 10%
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
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.
This 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
It is a constant, common to all stocks.
It measures the whole stock market's average historical
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.