Behavioral finance FAQ / Glossary (G-H)

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 Gam - Gar Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed / discussed, i: incidental Gamble / Gambler / Gambling Gambler's fallacy / paradox Due to their lengths, those articles     are in a separate page of the "G-H" glossary section Game playing Game theory Due to their lengths, those articles     are in a separate page of the "G-H" glossary section

GARCH / ARCH models

00/6i,10i - 02/02 - 04/9i + see
heteroskedasticity
distribution,
volatility, stochastic +  bfdef3

Watching the dancers moves,
from a tango to a waltz.

GARCH and ARCH models (*) are mathematical tools that measure how volatility
evolves
, showing how variable and stable / instable it is.

(*) GARCH = General auto regressive conditional heteroskedasticity.

They are used, for example, in financial markets.

 In most of those markets, prices rise or fall more or less erratically, with a price volatility that changes with time.

Price volatility often increases in periods of high uncertainty that
follows some unexpected
and hard to gauge event.

Also, bear markets, in which people are worried, are usually more
volatile than bull markets in which they are more confident (even
overconfident).

Those tools more generally, as financial markets are just cases among others,
apply to various other statistical areas prone to "stochastic calculations"
(see that word).

Their purpose is:

To take into account the instability that can surge in time series

(non-constant variance / non-constant deviation: see heteroskedasticity).

To include those measures in probabilistic valuations or prediction
models.

 Ge - Go Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed / discussed, i: incidental Gender attitudes to money management 08/2i + see style Mars and Venus? Studies have shown that, although generalization should be avoided, Female investors would be more risk averse, less optimistic and impulsive in their decisions than male ones. They might avoid adventurous investments, but on the other hand would get lower overall return. Young males see their testosterone level increase strongly when     facing choices.    They tend to make riskier, and sometimes more irrational, moves. Other differences (see "style") are between: Wealthy vs. poor (risk is a different thing for them), Young vs. old (they have normally different time horizons)...
 Generalization See reductionism, heuristic, stereotype Genetic algorithm, computing Genetic utility Due to their length, those articles     are in a separate page of the "G-H" section of the Glossary Get even bias, Get-eventis See commitment, cost averaging, loss aversion

Glamour stocks

03/5i,9i - 05/1d + see fashion,
growth stock + image types

Investors' darlings.

Glamour stocks are highly popular stocks ("hot" stocks).

 Most investors attribute them extraordinary qualities and growth prospects.

In parallel, their price rises in a spectacular way.

Those fashionable stocks tend to become highly overpriced
as their image coefficients reach stratospheric heights
.

Investors tend to delude themselves in their appreciation of their
future performance and to overpay such investments.

Their fame is due to:

Their past economic performance (cult companies),

People might think that such a past trend is representative of the future
trend (see representativeness heuristic).

An increasing information flow about their strong price rise, as it
gets noticed by more and more people and media.

That information surge tries to present, comment, detail or explain that
price rise
(see availability heuristic, rationalization, good story...), usually
with enthusiasm if not delirium.

This voluntary or involuntary "spin" might take place even when the
company has nothing to support those positive expectations
: no
profitability record, nor credible future earnings scenarios.

There are two main types of glamour stocks,
which it is important not to confuse.

Beware of counterfeited growth.

1) Among those highly popular stocks, some are legitimate "growth
stocks"  (see that phrase), but they are often overpriced.

2) Others are "shooting stars", as extremely fast rising stocks, but with
illusory qualities.

They might become later ..."fallen angels" (see that term).

They might be OK for very short term trading, although often with high
risks entailed, but much less for long term investment.

Goal

is in a separate page

of the "G-H" glossary section

Goodhart law

See numeracy, reflexivity,
observer bias, goal

The Goodhart law is a symptom of numeracy bias.

When a statistical indicator is widely used as a target , the players'
behaviors start to change.

It happens that:

Not only there is some "observer bias" (see that phrase) by which the

observer changes unconsciously the phenomenon observed (see reflexivity
for another example).

But also people who have a personal interest in the outcome try to meet

the numbers instead of aiming at fulfilling the real purpose behind.

 Thus the numbers get biased, or even manipulated, and lose their benchmark usefulness

Statistics should always be taken with some doubts. Under the appearance of
solid realities, they might cover real uncertainties.

Gr

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

Greater (or bigger) fool delusion

04/9i +
See rational expectations,
herding,
pyramid, overconfidence,
bubble, delusion, illusion

Hoping my naivety will be surpassed by the next sucker.

Definition:

The greater fool delusion is to buy an extremely overpriced asset
(under any rational valuation
standard), after a long price uptrend, on the
idea that a greater
fool  will buy it later  at an even higher price,
before the music stops and the price crashes down.

That (overextended) "trend following" phenomenon, by which investors keep on
to sell) assets although they know that they are overpriced,
is one of the factors that help bubbles persist and grow.

How to explain that behavior?

There might be some rationale in the assumption by an investor / trader
that there is a good chance that somebody else will do ...the same
assumption
and catch the grenade before it explodes.

But it can also be a delusion, as the investor has no certainty that the pool /
torrent of greater fools will not dry up unexpectedly in the immediate future.
In that case the greater fool will be himself.

 There is here some overconfidence (see that word) as the investor feels he will be the one who find the right time to sell before the other foolish investors start to sell massively.

Also rationalization, such as inventing new - but wild - valuation criteria
to justify the current or expected price can boost it.

This is a mother lode of gullibility that some gurus / pundits might exploit.

The book that predicted the Dow Jones at 36,000 is among the most caricatural
examples.

 Greed (& Fear) Due to its length, this article     is in a separate page of the "G-H" glossary section Group behavior Groupthink Due to their lengths, those articles     are in a separate page of the "G-H" glossary section
 Growth investing / Growth stock 01/6i - 02/8i,10i,12 - 03/1i - 08/6d + see value investing, fundamental analysis, glamour stock + image types Buying it because of its price or because of its speed? Definition: Growth investing is picking stocks on the basis of their past and expected future earnings growth (growth stocks). It is sometimes opposed to "value" investing, a style of investing which - in its most simplistic form - is more interested in the stock present earnings compared to its price. Where to find growth? Growth investing might be done by choosing stocks: Either on the basis of their price     compared to strict fundamental criteria about the business growth  prospects, and also to forward-looking stock valuation parameters This can be called prospective analysis and valuation. The trick is to find stocks that are undervalued in relation with their growth prospect. In this case, the difference between what is called a growth stock or a value stock is not too wide. Or on the contrary by extrapolating the past growth into the future, without being too much interested in the price paid. Here similarities might be seen with trend following. This belief that yesterday good weather guarantees tomorrow good weather might sometimes prove right, but it entails the risk of falling into a naive growth strategy.

Gu

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

Gullibility

belief, greater fool, illusion,
magical thinking, manipulation,
rationalization, story, wishful
thinking, etc..

Look twice and think twice!

People have a tendency to believe certain things or certain people without digging
further, sometimes against any reason.

This overwhelming attraction and the wish to believe is the source of
gullibility.

When people are under a strong emotion (happiness or gloom, love or hate,
greed or fear) they can be more gullible than in calmer times.

So better cool off before taking decisions!

When collective gullibility affects
financial markets

 Nearly all financial bubbles have been watered by the GG&H cocktail: Gullibility, Greed and Herding Beware when you see market bartenders serve it and market players drink it!

Gullibility explains many human and social interpretations, analysis, attitudes,
decisions and behaviors.

This glossary shows many forms and consequences of that bias:

Attribution, disinformation, greater fool delusion, illusion, manipulation,
rationalization, story, wishful thinking, etc., not to forget self-delusion.

 Gunning See funnel Gunning is a specific funnel effect in financial markets, that results specifically from technical analysis and stop loss orders. It might happen that a quantity of people (or computers), who use the same chart analysis or program trading method, place stop loss orders (either as a hedge or as a speculative move) more or less at the same price. => If this occurs in a shallow market, the price equilibrium can be reached          only   with an exaggerated price change. Guru 00/6i,8i + see obedience, manipulation Love them and follow them ...at your own risk! Often, groupthink or crowd behavior is directed by one or several manipulative / excessively charismatic leader(s) or guru(s). They gain a strong influence (based on excessive trust / blind admiration / passionate love, sometimes coupled with fear) on the other participants. This goes to the extent of short circuiting their own thinking ability, or even enslaving them or making them adopt excessive and damaging behaviors. The guru phenomenon has some similarity with the blind "obedience to experts" one (see that phrase). As already said, that phenomenon can also be a factor of groupthink / group behaviors / herd behavior when it comes from or leads to an assembly of followers. Investment gurus, although their power are rather diffuse can have a strong influence on investor behavior
 Ha - He Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed / discussed, i: incidental H coefficient, exponent 03/12i + see Hurst coefficient Habit Due to its length, this article     is in a separate page of the "G-H" glossary section Halo effect See availability heuristic, confusion Beware, a horse with good teeth might not be fast at the Derby. Beware also, not all quadrupeds are horses. The halo effect is a mental bias / as a misperception or reasoning confusion * in which we extend a good or bad trait of an entity (person, organization,    thing) to the perception of  the whole entity. Good teeth, good horse ? * or in which we apply - wrongly - what we know or feel in a domain to    another field. This is a kind of availability heuristic (see that phrase). As an example, to base economic previsions upon negative or positive political principles can be misleading. Another one is to consider a stock as a good investment because we are happy about a specific trait of the corporation (a product for example)
 Heavy tail See fat tail Hemline theory See (social) mood Herd instinct, behavior, mentality, Herding Due to its length, this article     is in a separate page of the "G-H" glossary section
 Heteroskedasticity 00/10d - 01/11i + see ARCH / GARCH models, volatility, (volatility) cluster + bfdef3 Welcome to "heteroskedasticity", the BF word which is the champion in the number of syllables, Eight of them (this is immediately followed by  "representativeness" with just one less). Definition (general): heteroskedasticity is an an unequal mathematical "variance"between statistical variations at different times. Definition (in market finance): In market prices, heteroskedasticity     takes the form of unstable volatility. It is an alternation / regime switching between periods of higher / lower volatility. It could be called the "volatility of volatility". See also (volatility) clusters, cycles. How to measure it? Heteroskedasticity is a probabilistic / stochastic (see that word) phenomenon that can be measured in statistical time series by using ARCH / GARCH models (see those acronyms)
 Heuristic (bias / shortcut / limited) (availability, representativeness) Heuristic Due to their length, those articles     are in a separate page  of the "G-H" glossary section
 Hi - Ho Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed / discussed, i: incidental Hindsight bias 00/6i 03/11i + memory, mental account, survivor bias + bfdef2 I knew it before it happened! The hindsight bias is the idea, after an event, that we knew that it would happen, even if we didn't have any opinion, or we were not so sure about it, or worse if we thought something different. In finance, this bias affects investors who have forgotten their original estimates or objectives but feel they have a gift to understand things in advance. When seeing the outcome, they are likely to use it as a mental anchor (see that word) and assume their estimates must have been close to it. They think they predicted from the start what finally happened, with the motto: "I knew it all along and always told so". This anchoring can also lead them to unrealistic expectations for the future, in the form of either overconfidence or underconfidence. It can create the illusion that uncertainty does not exist for you as you are so smart that you can easily predict things.
 Home bias 01/2i - 02/9i + see neighborhood effect, availability heuristics If I feel that all goodies are at home, why wander outside in the big world jungle? Well, maybe because you might miss something! Definition: The home bias (or "proximity bias" or "familiarity bias", or "neighborhood effect") is a rather common tendency by investors - mainly stock investors - to put a too big share of their money: In their own turf / backyard (own country, region, firm...),    this is pure home bias, And in things they see everyday (familiar companies and industries),    this is the "neighborhood effect". Is this tendency rational? This kind of primitive / instinctive selectivity has its pros an cons:   Pros: The home bias might avoid mistakes that could be due to venturing     into unknown territories. Cons: It might rest on an illusion of knowledge and information For example people investing in the same business in which they  work get a double bad surprise if something goes wrong for that business. Such a narrow approach of investment leads to an over-concentration on a few assets and goes against risk diversification, It is also an obstacle to find or exploit better or safer opportunities, that globalization and business evolutions offer It can be compared to an "anti-selection" as insurers say, even if it has the merit to focus on what investors (might) know well.
 Hope (& fear) See greed & fear, optimism, wishful thinking (investment) Horizon 03/4d + see time horizon Hot hand See overconfidence

House money effect

.02/10i + see endowment
effect, mental compartment

Serious money vs. fun money.

People are usually rather cautious on the risk/return prospects when they invest
their hard earned savings.

But not all monies are considered worthy of the same care (see mental
compartments).

Therefore they usually become less timid when they invest
specific types of funds:

 Money they manage for others (although, sometimes it can be the other way round, as they get less passionate, less dependent of greed and fear when their own prospects are not at stake), Or (nouveau riche effect), money that was easily, unexpectedly, suddenly earned or got by chance. Or, more simply, surplus money. Investors are usually careful when investing their initial savings, or reinvesting that initial investment. But once this operation rewards them with profits or revenues (house money), they take more risk when re-investing that surplus.

On the other hand, let us look at the bright side, they are in those cases
less prone to the disposition effect
on such assets when their value is
falling, as long as there is some gain left.

This is also because their "reference point" in the "prospect theory"
(see that phrase) is their buying price.

 Hu- Hz Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed / discussed, i: incidental Hubris 04/4i,10i - 07/7i + see pride, overconfidence, narcissism Hubris is an excessive pride (narcissism) or presumption (overconfidence) that can affect individuals or group. It leads to not well-thought and excessive decisions and behaviors,with negative consequences. Hurst coefficient, exponent 01/3i,10d,11i - 03/10i,11i,12i + see H coefficient, persistence, long memory Does the trend persist or perish? Definition: The Hurst coefficient (or H coefficient) measures statistically the persistence of a phenomenon.. It is a number that measures, in a sequence of historical data, if some patterns are persisting (market trends for example). If the coefficient is above 0.5, the trend is considered persistent and to show       a "long memory". Under 0.5 the trend is considered to be in decay or inexistent.

Hype

04/8i + see manipulation,
spin, pump and dump

Hyperactivity

disorder, boredom

Hysteresis

02/05i + see lag, latency,
underreaction, delaying
tactics,
diffusion, cycle

At first, nothing seems to happen.
This is because the magma may take time to erupt.

Better make moves before the surprise!

Definition:

 hysteresis (commonly called lag, inertia...) is a delayed (lead-lag) or slow response (underreaction) to an event.

It is a phenomenon found in physics (magnetism) but also used as an allegory
concerning reactions to information.

It is due to:

1) either a slow, and not immediate, diffusion of information (see that
phrase),

2) or a slow understanding of its importance for the future (because

of cognitive overload, and sometimes of cognitive dissonance)

3) or an underreaction in taking decisions and acting

accordingly, related to collective or individual psychological biases
(procrastination, delaying tactics...).

In markets,
that underreaction creates a price - or a price trend - "stickiness".

 (mass, crowd, collective) Hysteria 02/7i + see crowd, mass, herd, fad Collective hysterias are extreme forms of herding, such as collective panic or greed verging on delirium... In stockmarkets those mass behaviors lead to exaggerated rise or fall (bubbles and crashes).

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1) click "messages", 2) enter your query in "search archives".

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