Behavioral finance FAQ / Glossary (Perception)

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Year/month, d: developed / discussed,
i: incidental

Perception



01/1i,10i - 04/8i,11i - 05/8i -
06/4i - 06/11i + see image,

representation, perceived risk,
representativeness heuristic,
framing

We are all impressionist painters,
every one with its own vision of the landscape.

Definition:

A perception is a first feeling / impression /
understanding,

on a situation, object, event or issue.


This spontaneous mental reaction starts

* at the sensorial level (sensation)

* or (by extension) at the mental level

(here we are close to a representation),

 A perception is often felt as pleasant or unpleasant.

Perception and representation

Your five senses cannot be wrong, can they?
Perceptions cannot be false
, can they?

Hmm, better observe twice!

And be careful when perception takes the driver seat
and watchful when it gives the car keys to representation.

The intellect intervenes to organize such sensorial perceptions into more general
and abstract knowledge to become a representation (see that word)
that tends to stay in the mind (long memory).

The representation building process:

* either creates a more complete / elaborate image

or a more general / abstract model,

* or just categorizes / qualifies the object into

a preexisting image / model. Stamping it and putting it on
the related file!

Actually a perception

* can later be refined into a more abstract mental representation

* or, it is often the case, is more or less immediately positioned within an
   existing
representation: we see an apple, or something that look like an
   apple, we put it mentally into the 
"apple" category.
  

A mental representation can be built or completed, or just retrieved :


Either by using pure observation and logic.

Or by completing it with - or linking it to - some preexisting knowledge
   or belief
.

Or through subjective interpretation / imagination.

Many sensorial illusions, as well as cognitive or emotional biases,
can affect the perception or transform it into an illusive representation


To sum it up, there is often a mix of objectivity and subjectivity.

Anyway, the first perception has an important

weight on the following representation (see primacy).

People have a tendency to stay anchored on their first impression.

Perception / representation,
     reality and decision

When boarding the train, mind the gap!


Whatever the real facts, data and events, there is often a difference - or
evenan opposition (mirage, illusion) -
between

 * those realities

 * and what people perceive objectively / subjectively as realities.


Another gap might intervene between their immediate perception and what
the mind later solidifies and categorizes as a representation.

Those gaps are crucial, as perceptions (and representations)
guide most human decisions and actions.


There are even cases when perceptions / representations alter
reality itself
, as an analogy with the quantum theory, in which
the observer seems to alter the phenomena it observes.

This is "reflexivity" or the "observer bias" (see those terms).

Perception and asset markets

Painting the stocks

Applied to asset markets, the perception (and representation) concepts
lead to various behavioral finance findings, among which:

Availability heuristic (*), when investors act on
    the first perception, impression,
remembrance, idea...

Representativeness heuristic (*)

People might see patterns in random phenomena, for example in
price moves.

Framing (*): the way the decision elements are described,
   formulated
.

Perceived risk (*), higher or lower than the real one.


The notion of stock image / image coefficient (*)

It measures the stock perception / representation by market
players.

It gives their rating of the perceived qualities and perceived risks /
defects of a stock.

This rating is either conscious or unconscious, and either fair, too
high or too low.

This partly subjective rating skews their analysis
     (see "expectancy bias")
and decisions.


(*) See the glossary articles on those various phrases.

Perception and marketing

I see it, I touch it, I taste it, I find it nice, I buy it.


Sensory perception has also an effect on product buying attitudes.

Neuromarketing (see that word) try to detect how it favors or deters
purchases.

A study has shown that when somebody touches physically a
    product
  it has more chance to buy it,
(or to buy it at an higher price),

than when the person only sees it.

Maybe because it gives an advance sentiment of familiarity and
ownership (see familiarity, commitment, endowment...).

It is well known also that a nice presentation (through good designing,

attractive display) helps to market a product.

Well, wine tasting also favors wine selling.

Risk perception, perceived risk

See specific page

(*) 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: 27/08/15  

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