Behavioral finance FAQ / Glossary (Profile)

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

Profile / Profiling 1 (stock types)

00/7d - 04/3i + see image
+ bfdef3 + e5typimg.htm

Like any pet, any stock has its own personality.

Some are cute, some are boring, some are distasteful, if not
frightening.

=> Better know what pets or stocks you are feeding.

Definition:

To profile a stock is to identify:

The main traits that drive its price level and price

evolution, and more generally its market behavior.

What type(s) of stocks this one is the closest
   according to those criteria.

Broad stock categories

Stock tribes

Among some simple and well known stock types / categories, we
can cite, as a first approach, the differences between:

Growth stocks

vs.

Value stocks

Cyclical stocks

vs.

Defensive stocks

Blue chips

vs.

Small caps

But more sophisticated categories, smaller and finer groupings, can also be
found, as explained below.

On the other hand, those categories overlap and cannot be fully
clear-cut.

They are just indicative practical classifications.

They should not become close-minded stereotypes
(see representativeness heuristic).

Quantifying a stock profile

Not only an image, but also a value.

To quantify a stock profile, we can use a
behavioral parameter, the stock image coefficient
when assessing the stock
.

The image coefficient range indicates:

The level of the stock "structural" image (a kind of pivot),

The breadth of its image variation around that structural level.

Using stock categories to profile a stock

Identify the stock's DNA to find its family!

As seen above, groupings can be made of stocks with similar profiles,
in other words similar market properties / behaviors and potentially
similar image coefficient brackets
.

This identifies several stock categories / types, with their indicative
image range
.

This site identifies the main stock "families" or subfamilies (e5typimg.htm).

Every category is characterized by two "ranks":

Its level of market attractiveness (structural and maximum
            image coefficients).

And its level of risk (volatility, downside image coefficient).

Fuzzy and evolving categories

Not so clear cut species

Fuzziness

As said  above, the categories (and the data ranges that typify them) are
indicative.


We could talk here about about fuzzy sets (see fuzzy logic), in which there is
always some uncertainty and imprecision.

Fuzziness is present in most things in physical nature as well as in
human and social fields, in which classifications should not lead
to stereotypes
.

Evolution

Also, the stock's profile, thus its image bracket, can change after a while.

Then the stock shifts to a new category .


It is usually only after several years, sometimes decades, that a stock change
its "market positioning", as said in marketing circles.

The change can be caused

* by a sudden shock,

* and more often the fact that a stock has its

   "life cycle", from birth to death, as
   said also in demography or, again, in marketing
   circles.

Is it useful?

The advantages of being a stock profiler

Identifying categories can respond to various purposes:

1) To build efficient portfolio   diversification between stock
    behavior types

Here we have "style diversification", together with other 
diversification criteria: locations, industries...,


2) To select stocks that fit the investor profile (see that 

 phrase), with traits such as its time horizon, its risk attitude...


3) To allocate funds according to market situations:

Obviously, in uncertain markets some stock types are considered
less speculative and more trustworthy than others,


4) Or only as a stock valuation tool.

But handle with care!

Fine tuning

As already said, categories are imprecise.

To enter a stock in a category should better not be done on the
first perception (see primacy)
.

This sorting should be performed only after a thorough
analysis ,
in order to avoid generalization and
anchoring on a stereotype
(representativeness heuristic).

Thus analysts, as well as money managers and investors, should:

Check carefully how close the stock's traits fit the category description in 

e5typimg.htm, before attributing its image range and adjusting it, if needed,

If the stock combines the traits of several (usually neighboring) categories,
   use a half way house range.


Even so, nothing is foolproof, like all things in stock analysis, as:

There are very special cases (some stocks straddle several

categories or have unique market behaviors that do not fit any one),

Evolutions take place in the life of a business and of a stock, as well as
    in the way markets see things.

Profile / Profiling 2 (investors types)



 

00/7i - 02/7i - 03/9d + see
(money) personality,
agent-
based models, psychology,
risk attitude + investor
style
(glossary article) +
eprofile

Investing in style!

Every investor has its own way of playing the market, but broad categories can
be found..

The glossary gives some descriptions:
      see "(investment) personality", "style of investing)".

The risk attitude is an important element of an investor
profile.

But many other personality traits
and also the investor situation (age, occupation, family...) 
play their part.

Of course, in the same way that people choose their dresses to match
their personality, there is often a relation - or

"resonance" - between an investor profile and the
stock's profile (see above) that this investor prefers or avoids.

(*) 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
 vote on the glossary quality at
BF polls

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This page last update: 21/08/15  

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