Behavioral finance FAQ / Glossary (Fallacy)

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(logical) Fallacy


04/8i + see cognitive bias,
manipulation, attention bias,

framing, binary logic, story

Circles that look like squares.

Look closer, there must be a trick!

Definition:

A fallacy is a false argument / reasoning.

It contains
* either a hidden error 
* or a disguised lie.

=> It might lead to poor decisions and behavioral
      mistakes
.

The falsity can be found:

either in the reasoning (wrong logic),

or in the content (wrong facts).

Logical fallacies

False addition of true facts
or genuine addition of false facts

Among the various types of fallacies, a typical one is the logical
fallacy (*).

It is a reasoning mistake which has the solid appearance
of logic
:

Either a sound logical principle is incorrectly applied,

or an inexistent principle is disguised as a sound one.

(*) An intentional logical fallacy is a sophism or sophistry.

Beware of sophists, they look so ...sophisticated!

A fallacy that is not deliberate is called a paralogism.

Identifying fallacies

The illusion might come from a wrong neuron start,
or a wrong neuron path towards the conclusion.

A fallacious reasoning might seem logical, even obvious
at a
first glance.
But, by digging deeper, once the critical mind retakes
control, some typical biases can be detected.

There are two main types of fallacies, informal and formal:


1) Informal fallacy

Rotten or unfit ingredients in the soup.

It contains wrong or oversimplified / too narrow
assumptions, facts, definitions, wording
s at some step
of the argument.

"All Cretans are liars, as a Cretan said", to take a famous
old Greek paradox,
which flaw rests in the word "all" (always
beware of generalizations!)...

Here we are close to a "truth vs. untruth" binary logic, close
also to a "tautology" or a "circular reasoning" in
which the snake bites its tail.

A tautology is not bad in itself, but is perverted when it
   starts with
wrong hypotheses or facts ("gigo", garbage

in, garbage out).


For example, an economic model, however perfectly
conceived, only give results that are in line with the
hypotheses used.

A well-known economic fallacy is that to hire foreign
workers raises unemployment. Actually it can as well
boost the economic activity and create more jobs.

2) Formal fallacy ("non sequitur")

Messy mixing and wrong cooking of good ingredients.

It contains some perverted link, some logical
error
between the assumptions and the conclusion.
A non sequitur is a statement that does not follow correctly
another or several other statements.

For example: "people have legs, tables have legs, thus tables
are people".

Well, that one gives a silly exaggeration about those kinds of
fallacies.

They are subtler usually, if not they would not be so
common.

Precisely, here is a common one among investors:

"Growth stocks have a high Price/Earnings ratio.

  This stock, with meager earnings has a high P/E.

  Therefore it is a growth stock."

What can thwart the mental process?

Missing something?
Mixing up
things?
Or deliberately baiting?


Logical fallacies are cognitive biases by themselves, emotion might
help, as seen below, but is not always needed
to fall in such traps.

Their sole presence is enough to thwart the mental process that
leads to conclusions and decisions.

But they can be also conditioned by various other cognitive or
emotional biases.

Here we just need to fish in the pond of biases described in this
glossary.

A difference has to be done between

Logical fallacies that are involuntary, as simple
    errors
or confusions

.

They are caused by

* cognitive lapses (perception, reasoning, memory,
   beliefs...)

* and / or emotional overrides (pain or pleasure
   driven mental processes)

To stay on the cognitive aspect, we can cite lacks of
knowledge (or wrong knowledge / information), lacks of
attention, selective perception, halo effect, shallow
analyses, quick generalizations, defective checking...


Those used by people and organizations as tools of
    manipulation
& deception, disinformation and
    framing
(see that word).

They use such a figure of speech in (fallacious) rhetoric,
argumentation, propaganda, advertising.

Those perverse tools received a modern boost thanks to
neuroscience technologies.

On the other hand, neuroscience (see that word) can
also be a help to detect and understand them.

Why and how to detect fallacies?

On the look out for the soft spots 

Be aware  of logical fallacies

and of  "good stories"!

However convincing they seem, they can be used as a powerful
tool of deception.

In business, in politics and in everyday life, biased rhetoric is
omnipresent.


In finance for example, fallacies can be used to create a spin
that gives an appearance of truth
  to convince people to invest
in some assets in which it is highly probable that people will lose
their shirt.

As there is an impression of consistency and obviousness in
the reasoning,
a great mental attention is needed to
detect those fallacies

Better take time to ponder over the rationale of

some apparently brilliant advice, once the enthusiasm
cools off!

Often, back home, when you look at all its sides, and see
the soft points, missing pieces,
contradictions, medley,
small prints
, the persuasion effect might wane.

Also, beware of your own too obvious "conclusions"!

Fallacies can be collective

When everybody sees clothes on the naked king.

Some fallacies reflect collective beliefs / biased social learning
(see that phrase).

People are so used to those common errors that they don't really
try or want to check their truth or consistency and therefore
those beaten track fallacies persist for quite a long time.

To try to debunk those widespread fallacies
meets strong opposition (see "paradigm").

Not easy to fight dogmas, all the more if a

fortress of vested interests
has been built on them

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This page last update: 21/08/15

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