Behavioral finance FAQ / Glossary (Fallacy)
This is a separate page of the F section of the Glossary.
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
04/8i + see cognitive bias,
manipulation, attention bias,
framing, binary logic, story
Circles that look like squares.
Look closer, there must be a trick!
A fallacy is a false argument / reasoning.
* either a hidden error
* or a disguised lie.
=> It might lead to poor decisions and behavioral
The falsity can be found:
either in the reasoning (wrong logic),
or in the content (wrong facts).
False addition of true facts
or genuine addition of false facts
Among the various types of fallacies, a typical one is the logical
It is a reasoning mistake which has the solid appearance
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.
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, wordings 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
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
errorbetween 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
Well, that one gives a silly exaggeration about those kinds of
They are subtler usually, if not they would not be so
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?
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
Here we just need to fish in the pond of biases described in this
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,
* 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
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.As there is an impression of consistency and obviousness in
In business, in politics and in everyday life, biased rhetoric is
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
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
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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