Behavioral finance FAQ / Glossary (Memory)

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

Memory (short, long)



00/6i,7i,8i - 01/10i,11- 03/12d -
08/10d + see Lyapunov exponent,
H / Hurst coefficient, persistence,
longshot bias, anchoring, recency
bias, small numbers, time + bfdef2

It was such a long time ago, I nearly forgot it...

OK, but be wary of recent events,
they might not give the whole picture!

Short memory is predominant,
     but long memory can also be active

The short memory is focused on recent events.
    They might not be stored
later into the brain (that is why it is called
    ...short).
   
But it can play a stronger immediate role in decision making
    than
the long memory.

It feeds for example on availability heuristic (see heuristic)

The long memory is the remembrance of   

events that took place a long time ago, among them important or
salient ones

They are not always recalled when taking a decision as the short
memory tends to ...short circuit them

This kind of time warp against recalling old events is often called the
recency effect / recency bias (see that phrase).


On the other hand, in some cases, the long memory might be
affected durably by

* a primacy bias, a first impression they experienced a
   long time ago,

* or an anchoring on a past reference (for example the price at 

which they bought a stock on which they are still losing money).

Here the long memory stays vivid and conditions those people moves.

The Hurst coefficient (see that phrase) is a tool to measure statistically
the long memory / trend persistence effect, on markets for example.

Social memory and market memory

Money loss and memory loss

In economic and social behaviors, the recency effect
is most of the time stronger than the long memory.

The long memory, although more durable than the short
one, tends after a while to vanish or not to operate any more.

This takes various forms:

People tend to forget ancient trends or events or interpretations of events.

They bring some distortion in what they remember,

sometimes recording the contrary of what they have seen or heard !

New generations entering the playground did not experience those
   previous situations. Rather obviously, they have no ideas, or very few

and vague ones, about them.

According to some studies (Bob Bronson), memory is subject to an
exponential decay process.

Markets are not too Freudians, their subconscious mind is not really stuck in
their infancy,even if technical analysts find some traces of price memory
in their charts :-)

The collective loss of long memory can have dramatic effects, it might
explain why some errors are repeated generations
after generations (futile wars, deep economic crises...)

In financial markets this amnesia explains why 

some excesses (bubbles, crashes...) can repeat in
long intervals.

Investors, although anchored on past events (see anchoring) start

after a while to forget or ignore many of them.

Also, they are more interested in short statistics (see "small number")

than on long ones that might show better the probability of rare
events.

Additional factors are the salience and time duration of the original
eventand the strength of the information about it (Michel Wannke).

Those who saw the Moon landing on the TV remember it better

than what they ate at lunch on the same day. Even if there were
truffles with the roast!

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

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 This page last update: 11/08/15   

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