Behavioral finance FAQ / Glossary (Anticipation)

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

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

Anticipation


See Bayesian, expectation,
fundamental, probability,

speculation, betting

Finance and the future are close cousins.

Anticipation as a tool for decision.


Financial operations, such as investing and borrowing
to start with,
are bets on the future.

Any human decision which has crucial or long term effects, thus that goes
further than to choose between grey and blue socks on Monday morning, is
such a "speculation" (see that word).


To consciously (*) anticipate so as to make decisions,
thus to speculate, is a human specificity, what makes
people differ from lettuces or chihuahuas.


(*) beware of unconscious / semi-conscious bets, see automacities,
     heuristics, habits...

No surprise then that financial players try normally to anticipate evolutions.

Markets, and specifically financial markets, perform, or are considered
to perform, for the economy an important job, nearly a mission:

To determine adequate prices, taking the "bets" made by their players

as good anticipations of the evolution of economic fundamentals.

To help those players adjust those personal anticipations / expectations to

to new events that change probabilities (the Bayesian approach).

Can anticipation work in markets?

Can we see farther than the tip of our nose?

It seems that markets anticipate the broad evolutions, maybe better than the
experts' consensus, but far from perfectly, as some crises have shown.

This anticipation process has some shortcomings:

The general uncertainty of social and human phenomena 

of course cannot easily be overcome,

But how can you take any initiative in life if you never
anticipate what
could
happen, whatever the fog?

As said above, anticipation is a main trait of human beings.

To renounce it (thus to shun risk taking) is to be condemned
to a pure vegetative or reflexive life.
Well, some call it "transcendental".


Anticipating entails some subjectivity from individual
   investors
(and from professional managers also) about the

probabilities of future events.

This creates wrong or untimely appreciations of returns and
risks.

They can damage their money management results.

See all the "biases" cited in this glossary.


Market anticipation is not impacted only by economic
   prospects,

but also "contaminated" by the financial
market evolution
itself 
(see expectation, reflexivity,
cascade, mimicry...),
a kind of "circularity"

This can foster excesses and crises (see bubble, crash).

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

Members of the BF Group, please
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This page last update: 29/08/15  

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