Behavioral finance FAQ / Glossary (Greed & fear)

A    B    C    D    E    F    G-H    I-L    M    N-O    P-Q    R    S    T-U    V-Z

Full list

This is a separate page of the F and G-H sections of the Glossary

 

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

Greed (& Fear)



00/5i,8i,12d - 01/2i,5d,12i - 02/1i -
04/2i - 07/9i - 09/1i + see emotions,
hope, optimism, overconfidence,

risk aversion, mood, sentiment
+ bfdef3 site link

When the donkey drives itself
with its own virtual carrot and stick.

Greed and fear (or hope and fear)
are very common human
emotions (see that word), not to
say blind passions.


What are the sources?

Like most emotions, they are forms of

pleasure-seeking and pain-avoiding

reflexes or attitudes.

Specific areas inside the brain are affected, as activated and connected by
chemical secretions and electric waves (see neurofinance / neuroscience).

Those feelings reach the conscience from various possible sources:

Either in reaction to some external stimuli perceived as attractive
  or menacing,

Or as a product of inner mental processes

People can create their own hopes and fears even when nothing happens.

Boredom (see that word) is good at that!

Or by social contamination

Not only individual alone, but also groups and societies create their own
exuberant expectations and phobias.

Of course emotions might be needed to make people take positive
actions instead of staying passive. On the other hand, they can also
override rational thinking and distort decisions and behaviors.

Always check if your emotions
took the driver seat!

Some might not lead you where you should go.

A classical theme among financial traders

Market rodents hypnotized by the cheese ?
Or by the mousetrap?

In finance, the G&F colloquial phrase seems to have been coined
originally to deride what are seen as the two main motivators of stock traders.

The phenomenon is now largely studied academically and the expression widely
used.

Greed (or hope) and fear are emotions that:

Tend to distort the perception and appreciation of
   risk :

Sometimes (greed) by underrating its importance or even
    ignoring it,

At other times (fear) by exaggerating risk and seeing nothing
    else
as if hypnotized, and, as a result, acting in a panicky
    way


More generally, something common with emotions, might bypass

the rational thinking filter (and the ethical one) and motivate
directly many decisions and actions.


It is true on the other hand that without emotions,
there are few incentive to decide and act.

Emotions are cousins of motivations.

This makes emotions helpful, except when they become extreme
and
dominate decisions without being balanced by
reason.
Then they can bring damaging behaviors.

The case of fear

Real or imaginary dangers

Is your anatomy and chemistry sending judicious warnings
or playing tricks on you?

Fear, in its rawest form, might be the most primal, physical emotion that comes
from the "reptilian brain" (more exactly, the brain amygdala: see neurosciences),
as an instinctive way to react in front of a danger.

Also adrenaline, dopamine, testosterone and cortisol enter the fear cocktail
(well, some can also be found in the greed beverage).

Barman, can you add some Angostura to my neurons to cure my anguish?

Fear is quite useful to avoid a collision with the car that surges

in front of you, without losing time in philosophical analyses.

But in some other circumstances, it is a behavioral bias,

a source of inappropriate decisions when it paralyses reason.

As often said, "fear is a bad advisor" in various situations.

There are more "sophisticated" versions of fear, not linked to an
immediate danger, or even sometimes linked to imaginary ones.

Examples are anguish, phobia, paranoia, distrust,
or even demonization or hatred.

The case of greed, and its cousin, hope

Between hope and appetite.

Authors are divided about interpreting greed:

Some see greed is a mental phenomenon mostly related to pleasure
    or pain:

A strong personal desire or pleasure to
    possess more and more things.

Happy neurons and playful hormones.

At the same time, as a suffering not to own them.

Those two feelings go with the idea that suffering and pleasure
are the two main fuels of action.


Some see it as a learned social behavior, originating from
  
situationsof scarcity.

In this interpretation, greed is a mirror of fear, of a feeling of
insecurity.

Well, it might be present, but greed / hope seems to be more than
just transcended fear.


Some link greed to pure "rational expectations" (see that phrase).


Some see hope (the need to believe: see
   optimism, wishful
thinking), more than greed, as a main
  human motivator.

It might bring excessive and counterproductive behaviors, but on
the other hand it helps to take positive initiatives, and is a crucial
engine of economic development.

Well, between hope and greed it might be just a matter of
degree
.

Or an egg and hen system, as is sometimes the link that goes from
greed to overconfidence (or over-optimism) and back.

General consequences

Incentives to build ? Or to destroy?

G/H & F are very present in many human and social fields. Those feelings can
have crucial consequences. Their effects are dual: 

If they are moderate and under the control of reason (tame the beast!), they
   might help to avoid inaction in front of dangers or opportunities.

When they are excessive, overpowering, they can bring damaging
   outcomes.

Role played by G/H & F in markets

Exuberant or despondent markets.

If we take the example of how investors behave, fears - this is not a surprise -
strengthen their risk aversion (*), while greed / hope lessens it.

(*) Or , when risk is not measurable, their uncertainty aversion
     (see that phase).


Most people would accept risk when they know it (or think they know it) and
know also the potential associated rewards. There is something rational here.

But it is harder to accept uncertainty.
This foggy landscape is emotionally scarier than a known risk
that is
"scientifically" measured by probabilities
.

As a result, in asset markets (see the "sentiment" glossary article):

G/H & F is collective
  when mimicry is added.

Here E = Euphoria would be more descriptive
than G/F Greed/Hope.

The bulk of players gets either reckless and euphoric, or gloomy,
scared and even panicked.

This has a general impact on market prices and returns,
and notably on risk premia (see that phrase).


When those contagious collective emotions become exaggerated,
   their impact is even stronger.

They bring excessive behaviors, extreme price evolutions and
excessive positive or negative returns.

Bubbles and crashes are typical examples.

(*) 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,
 please vote on the glossary quality at
BF polls

separ

This page last update: 08/08/15   

   F and G-H sections of the Glossary
Behavioral-Finance Gallery main page pi.arlef.gif

Disclaimer / Avertissement légal