Behavioral finance FAQ / Glossary (Reaction)
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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
Reaction to info, news, events, signals
02/5i - 03/1i - 04/1i,3d,5i + see
attention, information, cognitive
under-reaction, surprise, signal,
Bayesian, feedback, misreaction
Any idea on how they will take the information?
Reaction to information is not the only cause of behaviors
but can have a crucial effect on them.
The "stimulus" caricature
A far-fetched paradigm:
The PUSH button theory
Some psychological theses about actions or reactions should be taken with
a lot of precautions.
This is the case of behaviorism that tends to attribute most human actions
to direct reactions to stimuli.
It is true that stimuli can lead to automatic reactions (see automaticity).
If somebody takes your parking place you might utter a few not too polite
But this is far from being what always happens, as:
In some cases, and if the person is trained to control its actions, its
brain might filter and stop the stimulus effect
Also various human actions can proceed from inner / self-generated
goals, intentions, memories, reasoning, emotions without external stimuli
A lack of stimulus (see "boredom"), such as decisive information, can,
instead of making people passive, make them impatient to start some
A field of uncertainty
Nothing certain about what can happen within t
he brain black box when info hits it.
There is always an uncertainty on...
...People will react
to supposedly good or bad news,
to an opportunity or to a risk, etc.
What will result from a new information,
how it will be taken or not into account, is never fully
predictable when it depends on human reactions.
Two glitches: irrationalities and delays
Right or wrong reaction?
Fast or slow reaction?
The reaction to events and information,
can be distorted by mental and
behavioral biases(see bias, information...)
is also often delayed.
People, not only can miss some information because of an attention bias (see
that phrase), but even when they take notice, they often need time to reach a
full understanding of:
Crucial, but unexpected, shifts in the physical, social or economic
Their possible consequences.
That is why they often react too late, or on the contrary too early but on a
wrong appreciation of the event.
One example of misreactions is the pead - post earnings announcement
Those reactions can be irrational ("non Bayesian", see that word) as people
can first underestimate and later exaggerate (or less often, the other way
round) the importance of the new signal (see overreaction / underreaction).
What types of information / events
make people react collectively is a topic in itself.
See the information article for details.
Economic / financial reactions
Reactive, hyper-reactive or lazy money?
In economic policies or marketing decisions, unexpected
public reactions are one of the snags (among other unforeseen factors and
perverse effects) that make the outcome not fully predictable, or even
unpredictable (see uncertainty).
The same unpredictability of reactions is common in many other areas such as
finance,management, sociology, politics....
Investors can misinterpret information and therefore have
a wrong reaction.
Quite often they neglect some relevant information
(underreaction) and exaggerate
(overreaction) other information
Actually, Behavioral finance stresses that reactions in financial
markets often follow an underreaction - adjustment - overreaction
three step process.
1) (short term) Under-reaction,
2) (medium term) (gradual) Adjustment,
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, impatience, habits, intentions or
goals and other psychological motives
Those drives operate even without new information and thus thwart
the "stimulus => reaction" paradigm by which behaviorists think they
explain human behaviors.
In such cases, market players might get tempted to react to noise (see
that word) or rumors.
They might even tell themselves stories to invent reasons to act.
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