Behavioral finance FAQ / Glossary (Belief)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

(common) Belief






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,
paradigm, representation.

Be careful about facts, they might disturb your beliefs!

Definition

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
issues:

In many cases there are no way to find and test certainties

(see pseudo certainty, pseudo intuition, certainty effect, and of
course, uncertainty)

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").

Assumptions are:

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
   decision.

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
    study),

Rigorous analysis (theoretical study) and testing 
  
(experimental study).


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
needed information,

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
     mental habits
.

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
   thinking.

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
      beliefs.

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
   forecasting.

This is one of the reasons why, as an example,  markets

do not obey fully probabilities laws, but have some structural
uncertainty.

Accepting beliefs,
    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
purpose
.

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
(see Bayesian).

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,
consensus...).

  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
        glossary articles.

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
manipulation.

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).

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

Members of the Behavioral Finance Group,
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This page last update: 13/07/15           

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