Behavioral finance FAQ / Glossary (Image)

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i: incidental

(stock) Image coefficient



Largely debated in the BF group
+ see extremes, BAPM, behavioral

analysis,
value, fundamentals,
profile, perception, representation
+ defimage

High definition picture or impressionist painting?

Definition (image).

What your brain sees ...or decides to see.

An image (or more precisely, a mental image) is, for
psychologists,

The mind representation (see that word) of a
reality,
or of what is thought or felt as a reality.

Obviously, there are often differences between

  * what exists or happen

  * and what people see or ...want to see (imagine).


Those differences between views and reality range from negligible to fully
distorted or even to opposite.

Various cognitive and behavioral biases can 

mischievously distort the objective / rational perception and
representation (see those two words).

Sometimes those biases even replace reality.

Everybody is a novelist and artist!
Stories and paintings supersede History and Nature!

Art is OK, it can open and enrich the mind,
but misrepresentations tend also to bring flawed decisions.

This glossary gives many examples of such mental bugs:

Wishful thinking, cognitive dissonance, representativeness
heuristic,among others. Not to forget "framing", quite
appropriate for an image!

Definition (stock image coefficient).

How the market sees and rates the stock

The image of a stock
is a coefficient that
quantifies the market
  sentiment and behavior
towards a traded stock.

To be more precise, the current stock image coefficient is an indicative
measure that reflects:

The current investors' mental representations and feelings about
   the stock.

And - here is the bottom line - 
   their current perception of its value.

How the stock image coefficient can be valued

Measuring the bridge between
market value and fundamentals

Every stock has its own image coefficient.
It is the bridge that links

its ECONOMIC value
   
its MARKET value

 

That coefficient is measured by comparing the stock's
market price
and its current "fundamental" value.

The equation is:

I = P / EEV, in which:

(I) is the stock image (typically, a coefficient between
    0.3 and 3.0),

(P) is the current stock price,

(EEV) is the stock's estimated economic value.

Here, see the "value" and "fundamentals" articles
and also, for an estimation method, the EEV page

The stock image bracket / range

An alternatively spreading and shrinking picture.

Prices and images play the accordion.


What makes the stock image coefficient usable in practice as a behavioral
stock
valuation tool is that it varies in time inside an (indicative)
bracket (see "extreme").

This bracket has:

A Minimum value (for example .9),

A Maximum value (i.e. 1.5),

A Structural (= average) value (i.e. 1.1).

Obviously, not all stocks have the same bracket.

Every one has its specific image variation range.


That range level and spread characterizes the stock idiosyncrasy, what can
be calledt he "stock profile" (see "profile").

But groupings of stocks that look alike can be done, as seen below.

Range categories and image valuation

All types of stocks are not equal, image-wise.


Although profiles differ between stocks, we can find groups of them
that share rather similar properties and image brackets.

Those groupings, called image categories facilitate
      individual stock
profiling and valuation.

As you can see when following the above link, those categories
are rather wide
and based on broad descriptions. Big families!

They are not rigid stereotypes, they cannot fully
match the traits of all specific stock.

=> The range has to be adjusted whenever needed.

Whatever the adjustments, the (future) range of a stock can be
determined only in an indicative way, as it comes from an human
appreciation of:

The stock specific traits

The stock market hazards
    (see below how an image bracket can mutate).

This is impressionist painting / filming more than high
definition video.

Are stock image brackets stable?

Occasional upgrades or downgrades.

A stock's profile, and thus its image bracket, can mutate to a higher
or lower
sport league, after several years or decades (or faster in the case of
a shock).

In other words, it might move to a higher or lower  bracket, winning the
jackpot or losing its jewels.

For example an emerging stock can become, or be perceived as,
a growth stock, a cyclical stock, or whatever.

What causes the mutation can be

A sudden shock affecting the company, the sector...

More frequently, the fact that stocks have their

"life cycle",from birth to death, as is said in
demography or in marketing circles

In what does this concept helps?

Behavioral pricing

The stock image is a key stock valuation parameter.

To determine the image evolution range gives a

precious help to estimate extreme
potential stock prices.

The equation above, however simple it seems, can be labeled a "behavioral
pricing model"
.

It is one of the tools used in behavioral analysis (as compared with fundamental
analysis, technical analysis, quantitative analysis, see those phrases...).

Another meaning of image (in marketing)

Reputation makes attraction.


The image of a brand is linked to the reputation and mindshare (see those
words) of the services and products of a firm (brands).

It is also linked to the clarity of the "market positioning" so that it matches
without ambiguity specific customer attitudes / quests (for ex. low cost vs.
luxury).

Usually that commercial image is built progressively
by satisfying those consumers.

It can also crumble if those customers become disappointed.

It might also be built, more artificially, with a    salient /
ubiquitous
presence and advertising that uses symbolic and emotional contents.

=> This favors a kind of availability heuristic (see that phrase), a Pavlovian
      reflex in
favor of the brand (but with some doubt about how deserved
      is that reputation).


A good brand is a factor of the firm's profitability.
Thus, it is an asset, a part of what accountants call the "goodwill" of the firm
in cases it is included in its balance sheet).

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This page last update: 19/07/15          

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