Behavioral finance FAQ / Glossary (Belief)
This is a separate page of the B section of the Glossary
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
00/5i,9i,12i - 01 /2i,5i,6i,7i
- 05/1i + see (social) learning,
meme, story, manipulation,
magical thinking, wishful thinking,
confirmation bias, gullibility,
certainty, uncertainty, pseudo
certainty, effect, illusion,
Be careful about facts, they might disturb your beliefs!
A belief is a personal (or collective) mental interpretation,
often deeply ingrained, that accepts as a truth
an idea, perception or representation,
(or in other wordsk considers it as a certainty).
Absolute certainty or
relative belief / assumptions
Dead sure? Or rather sure?
Or just taking it as an hypothesis?
The word belief involves a judgment of
full certainty, or at least of a high degree of certainty.
This complete or near complete reliance on such a judgment raises several
In many cases there are no way to find and test certainties
(see pseudo certainty, pseudo intuition, certainty effect, and of
This creates a problem when somebody acts on an anchored belief
(sometimes confusing it without taking precautions with "intuition",
a genuine subconscious neuronal pragmatic analysis of the situation) .
The semantic opposite of a belief is not the opposite belief but
"doubt"(thus an acceptation of the uncertainty of this world,
in which decisions entail conscious risk taking, not blind creed).
A certainty might become absolute, rejecting any notion that
contradicts it. It then becomes a near obsession and a 100 % dogma.
Also, if most known facts support the contrary, but the belief
persists, it might well be an illusion (see that word).
In decision making, beliefs, either absolute - or relative
and used only as assumptions - play an important part
(see below "beliefs and decisions").
Either temporary hypotheses, opinions, representations,
on which the decider builds a degree of belief,
he will be ready to adjust later when comparing it to realities.
Or the products of an absolute belief, which can distort the
Legitimate vs. biased beliefs
Enough evidences to support the belief?
Or built on shaky grounds?
A belief might be based on objective observations and logical reasoning.
But often a subjective interpretation, or even an illusion is at play, in
which less clear factors might intervene.
Then a belief might be formed:
After a serious study, but without absolute proof.
Then the belief is an "educated guess" or a "serious
hypothesis / theory / paradigm".
That study would include:
Extensive observations and data gathering (empirical
Rigorous analysis (theoretical study) and testing
Or without prior testing and with limited evidence
that it fits realities.
This could result from neglecting to dig further, or simply
because it is not possible to make tests and/or find all the
This situation leaves at least a possibility of doubt.
Therefore, here again, it is legitimate only if taken as
an adjustable degree of belief.
Or even, in some cases, although it has been proved
wrong , when the belief is obviously an illusion and
fallacy (see that word) or has become obsolete.
Such irrational beliefs can be not only wrong from the start,
but not adjusted when new facts confirmed their falsity,
This happens usually when a person is interested only
in information that comfort its own beliefs.
Here, deeply ingrained beliefs lead to anchoring ,
cognitive dissonance, selective exposure (see those
phrases) and many related biases.
Also, in money matters, it might be linked to loss
aversion (see that word) and/or to status quo bias.
It happens when, after buying an asset, an investor
ignores bad news about it and keeps it even if its
prospects are lower than what he thought when he
did the purchase. "I took a bad decision ...therefore I
persist" is the paradox.
As for the practical consequences
(see also below the section "beliefs and decisions")
Street fight between
opportune, naive and dogmatic believers
To believe in some principles can be useful to guide actions
withou having every time to re-analyze our roadmap.
Precisely because we live in uncertainty, we need some temporary /
opportune interpretations / beliefs in order not to say passive and
to make bets (or to react on pure reflexes)
On the other hand, this can bring some gullibility and/or a
persistence, which might be more or less dogmatic, on
paths that might be sterile or even harmful.
How beliefs are built, in a time scale:
persistent vs. transient beliefs
Built on sand or on solid ground?
1) Beliefs can be emotional reactions to avoid the pain of
uncertainty. Herea "wish to believe" that is strongly ingrained
in the believer.
2) Beliefs might result from an observation of facts and a
rational mental process (deduction / induction)
Then they have a chance to be reevaluated when crucial new
facts or understanding are discovered.
3) They might have been built and strengthened over
time, to become "wired" in the brain as persistent beliefs and
They help orientate decisions without having to reanalyze things
all the time (see heuristic).
This is quite practical. But the decider might fall into sticky
routines even when situations change.
Such belief persistence is often related, as seen above, to
anchoring or cognitive dissonance.
4) But beliefs might also result from transient phenomena and
rushed unchecked perceptions when they:
Are triggered more by emotions than by facts and rational
It does not mean that all emotions are counterproductive, just
that some balance has to be found between the
affect (and ethics) and hard facts and reasoning.
Result from neglecting objectiveand relable mathematical
probabilities if they exist, replacing them by
subjective ones (see anchoring, base rate fallacy...).
Distort also subjective probabilities - even if they are the only
available ones (the case in many new situations) - by
neglecting some scenarios for example.
In the worst cases, replace fully hard facts in the mind, creating
persistent illusions (see wishful thinking, back to item 1.
in this table)
Beliefs and decisions
How beliefs create fog for forecasters.
And to what extent it is OK to decide on the basis of beliefs?
Beliefs play a part in human behavior when they translate into attitudes (*),
decisions and actions (or lack of actions).
(*) Some personal inner attitudes such as optimism and pessimism (see
those words) can be considered themselves as "generic" forms of
The part played in human behaviors by beliefs - and specially
untested beliefs - contributes to uncertainties about
what people will decide (and the outcomes)
This is one of the pitfalls of social, political, economic or financial
This is one of the reasons why, as an example, markets
do not obey fully probabilities laws, but have some structural
but as temporary working hypotheses?
See also the above section about "practical consequences"
Precisely because things are rarely fully visible and certain
and the future cannot be fully known, beliefs, or at least an (adjustable)
degree of belief vs. doubt, can help build assumptions for decision
For example, fuzzy logic (see that phrase) uses high / low / higher /
lower possibility or "degrees of truth" as a substitute to
probabilities when they cannot be clearly defined.
Bayesian probabilities (see that phrase) are also based on "priors".
But in both cases the goal is to use them as temporary
assumptions that will be progressively tested in an iterative process
Common beliefs and social influence
Believing what others believe ...or what they try to make believe?
Better learn to screen common beliefs!
Some have a basis, others have none but repetition
has solidified them in the collective mind.
The tragedy is that non-believers are in a risky position,
as unpopular among believers!
Human groups and societies are playgrounds where common
beliefs / conventional wisdom abound (see groupthink, social learning,
Such collective beliefs influence obviously individual beliefs.
This plays a part - for good or bad - on economic / financial events.
For example common investors' beliefs in future market price
prospects influence stock prices.
This happens whether those common beliefs are based on
sound analyses or on the contrary on shallow perceptions.
Sometimes those belief-based market moves can be self-delusive
and strike back the believers.
There is a latent risk when following the investor "consensus"
and the market "sentiment", as described in the related
Another thing is that paradigms can reign for a long time, until a new situation
shows that they were just a belief.
Something crucial is that there is a "wish to believe" in the human
mind that can reach gullibility see that word), and makes beliefs prone to
Such manipulated beliefs can be created by spin, by a
"good story" with a good yarn.
They might be spiced with either pseudo-scientific gibberish that
gives it an appearance of credibility, or with biased metaphors
that talk to the emotional brain (see propaganda).
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1) click "messages", 2) enter your query in "search archives".
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