Behavioral finance FAQ / Glossary (Information)

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This is a separate page of the I-L section of the Glossary

 

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

Information (incidence of, role of, reaction to)

 

 


 

00/5i,6i,12d -01/1,4i,11i - 02/4d,12i -
03/1i,9i - 04/5i - 05/2i
- 06/9d -
08/3d + see news, cognitive overload,
signal, transmission, percolation,
reaction, misreaction,
manipulation,
over-/ under-reaction, information
anomalies, EMH, asymmetry, surprise,
noise, salience, weak signal + bfdef

To be well informed is not enough to make us wise,

But it is illusive to be wise when misinformed.

No need here to define information except that we can say that

  What is not an information but is a "noise" (see that word) is
     something
that looks like an information but

     * neither shows a change in the state of affairs

     * nor clearly confirms that this state will persist,


     Well, it can also be a disinformation / red herring when intentional.

Information is the deciders' food.

More specifically, information, with some (biased?)
premium on the
latest news, is
the investors' food,which determines largely
market activity and prices.

All that does not mean that any information is a good indicator
of what people will decide and do and what effects will follow.

There is always some uncertainty on how
 (and how fast)
people will react to information
  and take it or not into account (see "reaction").

A sociological parenthesis:
     the information / knowledge society

It was said that love drives the world.
But information took now the driver seat


Nowadays, many watchers of society say we entered the "information
society"
, in which information becomes the main commodity.

Such a society, and its economy, are based on "intellectual capital".

This means that knowledge - a wider notion than just
information as it entails learning and creation - reaches the status of:

The top productive economic resource
    (factor of production)

The most precious wealth (or capital).

Progressively the main source of economic /

    social power (*).

(*) It is at least a source of personal power.
     But only if collected seriously
and used wisely 
     Here the whole gamut of mental biases can interfere.
     But let us not talk politics ;-)

Information and market prices

Do market prices reflect what is going on?
Do you trust market prices as informers?

There are controversies: about the effect of information on prices. but also
about the effect of prices of events

Prices are information in themselves. Some theorists
even state that asset
market prices include
all the economic information needed.
They see the truth in the stew!

That fascination for numbers might be OK, but with the problem
that in a complex world, it is not easy, even with big data and artificial
intelligence, to unravel the whole bundle of information that
drive the market price

This information overspill would include:

As well hard / cool facts that describe objectively

the goods, services and assets,

As soft / hot facts, such as the current crowd's mood.


And also

Relevant information , objectively liable to change risk /
   return anticipations.

Irrelevant information, often called "noise" (see that

word), and also wrong signals and false information.

"Weak signals", as not too salient information but
     that might have a big impact on prospects.here we have (see
    
that word).

Another thing is that prices are not always well known.

They might be highly volatile (see volatility).

Also there might be differences of prices between sources,
   
buyers, contracts and markets.

* Who can tell the price of an airline ticket, when yours can be

 quite different from what the person seated near you has paid?

* Also some stock transactions are done in "dark pools" instead

of the stock markets in which they are listed.
Good bye, transparency!

A bipolar pricing effect?

Clean and direct impact? Or dirty and indirect?


Those traits have led to two main approaches about the effect of
information on asset prices
, which are:

1) The Efficient market hypothesis (see that phrase).

It considers that prices integrate all known information.

Thus market prices would change only, and then suddenly, when
an unexpected
news (a "surprise" , see that word)
occurs.


This goes hand in hand with the "Random Walk
Hypothesis"
as such unexpected new events / information happen
randomly

Theoretically, that would mean very little market activity, as
there will be few reasons to buy or sell if stocks were priced
perfectly by the market.


2) On the other hand, Behavioral finance (see that phrase)
    sees a lot of
deficiencies in the way information is
   
obtained andused by markets:

Deficiencies in
information

dissemination (see
that phrase) 

A conventional idea
is that nowadays
transmission is nearly
instantaneous.

But in many cases
it can be:

thwarted
at
some step of the
transmission chain.

quite slow.

even abort











 

 

 

 

 

 

 

 

The theory of information shows that the diffusion
speed, reach and quality
depends, among other
factors, on:

The sender and the information channel.

The sender / channel might be unbiased or 
biased, reliable or not, popular or not, fast
or slow...

The receiver.

Dissemination may occur at different speeds
for different investors
.

It depends on their interest, their closeness to
sources and other individual factors: the
asymmetry of information
(see that phrase)
is everywhere in finance.

The signal's strength (see "weak 

signal") compared to the strength of the
surrounding irrelevant "noise".

Strength can also be defined as the deviation
from expectations
(see "surprise").

Its frequency / repetition:

When it is repeated like a slogan or
mantra, if only by the same person it
tends to become familiar and to seem
true and relevant.

The "weight" as importance / relevance for
    fundamental valuation,

We have here the
strength / weight
matrix (*)
:

   Strong signal
x Low weight

     Over-reaction.

   Weak signal
x High weight

    Under-reaction.

(*) Replace
"strong"
by
"frequent"

and "weak" by
by "rare"
to
get similar
effects.

You can even
combine all this
into a cube.

(biased) Reaction

to information (see

detailed article in this

glossary),

The reaction

is subjective and often
delayed and biased.

People need time to
fullay understand:

Crucial, but
unexpected, shifts in 
the physical, social or
economic environment,

Their possible effects.

 

 

 



For example, investors not only can misinterpret
information but quite often they neglect relevant
information (under-reaction) and exaggerate some
other (overreaction).

Actually there is often a gradual market
reaction as was shown via Behavioral finance
experiments:

Phase 1.  Short term      Underreaction.

Phase 2.  Medium term  Adjustment.

Phase 3.  Long term       Overreaction.

Also, investors can react to ...a lack of
information
,

Either because this absence can be telltale (the
   dog
did not bark),

Or because of disappointment, boredom and
   other feelings.

In such cases, market players might get tempted
to react to noise (see that word), rumors, or
might even tell themselves stories to invent
reasons to act.

Practically, that makes two kinds of relevant information
    for investors:

Narrow market info vs. wide world info.

( Endogenous) information, that come from

the market itself: price, volume, momentum (*).

( Exogenous) information, from the
   outside world, such as the economic situation and the
    firm's prospects (*)

In some periods, investors get  more attentive to the first ones, focusing on
their turf more than on the world wide playground

Also those two categories may either conflict or cross-strengthen themselves
and create their own biases (see reflexivity).

(*) Economist or company executives might use opposite definitions:

for them the economy / the firm is the endogenous reality,

the stock markets are the exogenous one.

 

 

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

Information anomaly

See asymmetry, manipulation,
disinformation, media distortion

Information is food.

But are all foods healthy, for you and for the market?

More specifically,
are you told the whole truth and only the truth
?

Information anomalies, in the sense that informers do not give the real or full
pictures, can range:

From slight or involuntary distortion ,

To plain manipulation / disinformation.

See also media distortion, and asymmetry (of information)


From "omerta" ( hiding information),

To "star system" (overflow of trivial and biased
    information).

Informers with an agenda in politics, finance,

the show business and some other social fields know
that an active "news flow" 1) avoids oblivion, 2) drowns
crucial facts, including negative ones (for them, silence is king),
into asuperficial spin, and 3) keeps the market interest running.

When people get conscious of such anomalies,
they tend to trust less and less the informers.

When this happens in financial markets, it creates a climate of uncertainty,
and makes people wary of investing.

Information asymmetry

See asymmetry

Information bias

See information
overload, numeracy bias

When greed for info is fear of action.

The information bias consists in gathering so many information
whatever their relevance and reliability (see "numeracy bias"), that we
get
drowned in it (see information overload), and cannot spot
the
leading thread to understand the issue.


Better put a limit to data gathering, as there is a moment when we have to
take decisions and when delaying tactics (see that phrase), under the
pretence that we need more data and information
, become
counterproductive.


Information cascade

See cascade

Information dissemination / diffusion / transmission

  Due to its length, this article
      is in a separate page
of this
      "I" glossary section

Information economics

See information

Information overload

See cognitive overload


(mental) Information processing

01/11i + see neuroscience

Information feeding and digesting

Mental information processing (mental IP) is a field of academic study and
knowledge in itself, linked to psychology, neuroscience and social psychology.

It shows how various inner functions - that might be biased - interfere in
reaching a conclusion:.

Attention,

salience, memory

Logic

Generating

ideas

Representations

And other cognitive (and
  emotional) aspects.

To understand how this works is crucial in financial markets, as
their main commodity is information.

Some software try to reproduce this process - with or without
"debiasing"it - to prepare decisions (see "model").

Those computer programs are used in various professional fields,
among others in money management.

They work ...as long as situations and events do not enter new
and unexpected territories.

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

Members of the BF Group, please
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This page last update: 09/09/15  

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