Behavioral finance FAQ / Glossary (Affect heuristic)

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Dates of related message(s)
in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

Affect, affect heuristic


03/6i + see emotions, sentiment,
mood, attitude,
heuristic, trust,
automaticity

I love it! I hate it!

Definition (affect):

The affect is the conscious part of an emotion (see that word).

Emotions, based on pain and pleasure, are factors in many decisions.

Definition (affect heuristic):

An affect heuristic is a quasi automatic emotional response / reflex or
decision (see automaticity bias), which is linked to:

The (durable) decider's love / hate, or liking / dislike
   of something or somebody (personalization),

Or his / her (occasional) mood (see that word), when
   feeling happy or unhappy.

The person might label wrongly that attitude as "instinct", whatever the real
nature of the stimulus, emotional or not, that influences it.

This emotional behavior might be illusory and go against rationality.

This can be compounded by the fact that our emotions (see that word)
tend to have a primacy over
our reasoning.

This is not a condamnation of emotions,without which we would be robots
or passive vegetables; but a reminder that we must stay aware  of what
really drives
our actions and keep enough control on them.

A doctor, lawyer or detective is hardly neutral when a case is
about a member of its family.

For investors, the affect heuristic can cause a home bias (see
that word), a trust in what is familiar.

Examples in investing

Can the affect makes blind to the risk ?

Swindlers can take advantage of the (positive) affect heuristic, as a factor
    of trust

A reason why Bernard Madoff was trusted by its victims is that he
was considered as ...a nice guy.

This trust factor can also encourage clanism / groupthink / mimicry /
   herding
, as a feeling of togetherness.

According to a well studied example, people, and among them investors,
    tend to feel more optimistic when the sun shines!

They react or decide accordingly, for example they feel an impulse to
consume or invest.

A good feeling towards a stock (positive affect) might lead to a lower

risk perception and a higher benefit perception,

This goes against common market experience by which high return
prospects entail usually a higher risk (see risk premium).


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