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This is a separate page of the N-O and T-U sections of the Glossary

 

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

Overconfidence bias, overconfident

(+ under confidence)


pi-arrig.gif Due to its length, this article is
       in a separate page
of the

"N-O" and "T-U" glossary sections

Overleverage



Due to its length, this article is
       in a separate page

of the "N-O" glossary section

Overoptimism

See optimism, overconfidence

 

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

Overpricing / underpricing


03/1i - 04/5i + see price anomaly,
mispricing, value, fair value,
misalignment, trend over/
under-reaction, extremes.

Is it worth the price?

An overpricing or under-pricing, is a mispricing / price anomaly

in which prices are well above or well under their
theoretically "reasonable", "realistic" or "fair" potential value.

Of course, we can talk endlessly about how relevant and perfect such
a "fair" calculation is:
see "value".

What might cause that anomaly?
    What does it entail?

What made it wrong?
And what is wrong?

A market mispricing usually results from
investors over- / under-reactions
to information
(see those words)

In financial markets, it extends to asset returns:

As those returns include the assets price evolutions,
a price anomaly shows a return anomaly, and vice versa.

Does it persist?

A long wait for the price repairman.

A mispricing should normally be corrected quickly (because of reversion to
the mean / negative feedback).

But in real market life, at least in stock markets (*) such an anomaly

might persist for a long time.

The anomaly can even amplify (positive feedback
loop), get worse, even wild, and send prices to

extreme lows or highs (see extremes, overreaction).

(*) In commodity markets for example, anomalies are usually
      shorter-lived.
     
This is because "physical users" have to deliver or take
      delivery, with
tons of potatoes in the bathtub, and even more
      important, they 
make their cost calculations.

Whatever their fear or greed, they would not accept to deal at any

price.  Well, except those who have no choice, and the immature
ones of course!

A notion that can be ambiguous

It depends from what side you look.

A problem is that a mispricing is not easy to spot .

Its detection can only be done by comparing the market price to a theoretical
estimatethat is supposed to give a "fair price".

Therefore a supposed price misalignment can come from various
"bugs":

Flaws in the market players behavior,

Maybe technical defects in the market structure and rules,

As well as flaws in the estimation model

A two edges issue!

We have here the battle between

* the purported "efficient price" given by the market

* and the purported "fair price" given by experts.

See efficiency, fair price...

Here comes the question:

What can be the use of a model that gives estimates that
differ from (current) price reality?

Well, we could say that what experts might call a fair price is the
potential price the market might reach once investors rely on their
...expertise.

 

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

Overreaction / overreact (+ underreaction / underreact)


Due to its length, this article is
       in a separate page

of this "N-O" glossary section

Oversimplification

See heuristic bias, stereotype

 

Over-reliance

- on analysts, experts, advisors

- on management objectives

- on numbers, models

- on rules, regulations

Due to their lengths, those articles
       are in a
separate page

       of this "N-O" glossary section

 


Overtrade, overtrading


01/2i -05/7i,9i - 06/11i + see
noise trading, attention disorder,
hyperactivity, time horizon,
undertrading, arbitrage

Running after the market


Definition

In a trading frenzy, no time for coffee,
a caffeine pill will do.

Overtrading is a behavioral bias that strikes an hyperactive investor
or fund manager who makes
too frequent buy and sell operations.

Those runners spend their time in reshuffling in a hurry their assets,
even in the absence of meaningful information (noise trading).


This could be called a kind of "reverse divestiture aversion".

Although it might also, paradoxically, be assimilated to plain divestiture
aversion:

An investor, after selling reluctantly an asset, runs to buy another one,
even if is not the right time, as he dislikes "to let money sleeping"
instead of owning again something he considers tangible.

Consequences

Erratic driving

Studies have shown that such compulsive and usually not well-thought actions
(see "attention disorder" as an inability to focus), in which emotion plays
often an important
role, bring damages to those players.

They generally lead to wrong timing, losses or underperformance

and excessive brokerage fees.

Overtrading becomes rather common in bullish periods (this is
seen in the volume of stock market transactions in those periods), when traders
get the exhilarating feeling that they make money whatever they do.

Such a "gold fingers" type of overconfidence or overoptimism can be a
disaster when the market trend reverts ...and fingers get caught in the reverting
cogs.

For undertrading, see "status quo bias".

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This page last update: 20/08/15  

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