Behavioral finance FAQ / Glossary (Habit)
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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
09/1i + see also automaticity,
style, learning, script, heuristics,
underreaction, status quo bias,
Does living on autopilot makes free?
A behavioral habit is the automatic repetition of the
same action / behavior, something close to a physical reflex (see
automaticity bias) but usually learnt by practice.
A mental habit (habit of mind) is to think by using always the same
This is akin to an heuristic (see that word).
In what respect are habits
specific behavioral traits?
Habit is a second nature.
Like nature, an habit helps you, or traps you.
Human beings tend to think and act often in the same effortless - or at least
systematic - way.
Some habits are useful, some others can be harmful, as seen below.
An habit is
* as well a physiological / mechanical phenomenon
* as a psychological / mental one.
Habits go often beyond cognition and emotion,
by becoming unconscious automatic
practices and rituals, repetitive physical actions.
Such automatisms are pure behavioral biases, not
directly linked to cognitive and emotional biases.
This does not exclude that, at some steps of habit building,
Some emotional pleasure or pain get involved, notably at the start.
On the cognitive side, some neural connections get wired within
the brain (see neuroscience).
The extreme case is found in some addictions, forming an inner
slaveryin which the compulsion, even if when is conscious, is
hard to resist.
What causes habits? Are they useful?
Does practice help us to behave rightly?
Or does it make us lazy and inattentive?
Cause #1: Learning .
Except for some primitive instincts, like crying to wake up
parents once they succeed at last to sleep, habits are not
natural traits present at birth. Instead, they are learnt.
The human mind learns standard ways of analysis (heuristics)
and standard responses (scripts, conditioned reflexes...).
They are learnt progressively by practice until they take "the
force of habit".
Some habits are idiosyncratic, as self-taught, sometimes
because of some special personal event.
But many habits are learnt by social imitations (see below
social habits) and education.
Cause #2: Practicality / necessity.
Habits are practical tools.
They free the mind for other purposes, by avoiding to reconsider
things all the time, a waste of time and of mental and physical
Habits are eeded to a certain extent (see below "consequences")
although they are also "ruts"that prevent innovation and
adaptation to new situations.
Good and bad habits
* There are good habits in the sense of useful - or even necessary -
ones (brushing one's teeth...)
* and there are bad ones that are repeatedly
harmful (drinking too much...).
A good habit in some place or time might be wrong
in another time or place.
Also, some habits are not fully relevant or updated.
Some moralists label what they consider the "best" habits as
"virtues" and the "worst" ones as "vices".
There is some attribution (culprit-making) and simplification here.
See attribution / demonization / deification.
Also it would be abusive to consider all harmful habits as
addictions, a word used for illnesses in need of medical treatment.
Social habits, and their incidences
in economics and finance
Some habits are common to whole population segments.
Such social habits invade many behaviors.
Actually many individual habits are learnt socially, by imitating
Habits, and mainly social habits, have crucial consequences in
economics and finance, social areas in which situations
can dramatically change.
What was the "best practice" glorified by all pundits yesterday
might be noxious today.
Then "de-learning" has to replace learning.
Habits are hard to change
even when necessary
Getting out of the mental trap
Some habits are basically counterproductive (and even perverse and
Others, which were useful in some situations, become no more
adapted, their "best before" date is over, when situations change and
new challenges arise.
People have to change dramatically, or at least to correct and adjust
(see adjustment), their damaging habits.
They have to "de-learn" such previous practices.
But this is not always what happens, as there is a common
resistance to change (see status quo bias) a tendency
to stick to ones' usual ways of doing things.
When people get prisoners of the mental pathways (*) created by some
habits, they tend to neglect or avoid to reanalyze them, or they do it too
In extreme cases of addictions or compulsions, they are so hard to change
that they need treatment.
(*) As neuroscience studies have shown, some neural connections get
practically "wired" through repeating the same thoughts or behaviors
That tendency to keep those practices rests often on a mix of cognitive
and emotional biases:
Comfort and commitment
To avoid to learn new ways to behave, with all the efforts and
fuss entailed, could be felt as preserving one's comfort.
This neglect might be called (mental) laziness .
Keeping the same practices might show a commitment
(see that word) and sometimes an addiction.
Greed and fear
Fear (of the unknown) might take a big part.
A feeling of uncertainty might lead people to consider that any
new situation can only be worse than the one before.
=> They prefer to resist that evolution (see status quo bias).
Conversely, over-optimism (and hope, greed,
pride...) can also sometimes bring resistance to change.
Here the feeling is that things will get better without having to
make any change in one's way of doing.
Consequences of habits on decisions and actions
The autopilot can miss some challenges.
As seen above, some moralists label what they considered the "best" habits
as "virtues" and the "worst" ones as "vices" (or addictions).
Well, we better dig deeper than those oversimplifications.
On the plus side
On the minus side
Habits save time and effort
and simplify things.
Without the breathing habit, we
would lose our time wondering
how to breathe.
They might avoid indecision.
They might be a support of
For example it is a "good habit"
to stick to a checklist"of what
to analyze before investing in a
This avoids to be carried away
by a first perception or by the
collective exuberance or panic.
They might make unable to see and
adapt to new realities.
To behave in a rut stifles adaptation,
progress, innovation, (unless of
course if the habit is to try to ieave
When too simple (see heuristic),
habits do not fit the world
All this might cause under-reactions
(see that word) or maladapted
resistance to actions.
Investors and money managers who,
in bear markets, apply practices that
made their success in bull markets,
or vice versa, get into trouble as the
Social habits and their effects
on society, economics and finance
Same crowd always boarding the same train,
but is it the right train?
When many people share the same habits (social habits, socially-
accepted habits, common rites...), they have obvious consequences on
their social environment.
This is linked to social learning, mimicry...
Here are examples in economics and finance:
In those areas , some collective habits might be "virtuous"
(investing for example) while others can paralyze evolutions:
Social habits give some stability to the economy.
Without common habits and formal or informal rules, the economyOn the other hand, social habits might lead to stagnation
might be chaotic and completely unpredictable, which would
paradoxically stifle initiatives, and of course investment.
by freezing any progress.
They can also bring environmental problems by consuming always
the same resources until their attrition.
Schumpeter saw economic progress as a destruction of obsolete
activities / methods to make room for new ones.
The market price evolution might become anomalous if people go
on playing the previous price trend (procrastination) even when things
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