Behavioral finance FAQ / Glossary
(Representation, Representativeness)

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

(mental / cognitive) Representation



00/5d, 6i,10i,12i - 01/2i - 02/9i 
- 03/6i,11i - 04/7i  - 05/1i,5i
+
see image, perception, cognitive,
attention, neuro-linguistic, framing,
heuristics

How we see it ...and then label it.
Or ...want to see it and to label it.

From perception to representation

First, we see it, Then either we forget it,
or we process it and record it within the long memory
to a mental file that seems appropriate.

Quite tidy ...but maybe too much.

Definition:

We see something round, this is perception,
we recognize it as an apple,
this is representation.

More precisely :  

A mental /
cognitive
representation
is the way we:

 

 


picture, define, categorize,
imagine, interpret, explain or express
something in words, images, music or whatever.

A representation is a product of our
intellect, an abstraction (idea), a mental
"model", an image,
that will stay in our
long memory

In practice:

A representation

of an object, being,

symbol, event,
situation

or (in
   economics) 

of a product,
service,asset or
market is the

     mental process 
     that:

1) Follows (*) its perception, a job

done by the five senses and of the short
memory, see "perception" in the glossary,

2)  Associates it with some other 
    object,being, symbol, event, situation to 
    build a mental abstraction / image / idea 
    / model / belief
,

 3) Stays in the mind even while the

 perceived object is no more present.

(*) A perception can later be refined into a more abstract representation.
      Actually it is often immediately positioned within an existing mental
     
representation: we see an apple, we put it mentally into the"apple"
      category.

Are our representations always relevant?

As representations influence decisions, an issue is to find out how
relevant a representation is
.

This supposes to take into account that, here come the trouble,
the original perceptions that feed our representations of reality:

Can be more or less right / wrong at the sensorial level,

Can then be processed by the mind in a more or less objective /
   subjective way.

Whatever happens in those two
steps
(or three, see the next table below)
might generate a
- more or less -
distorted representation
(misrepresentation).

It is crucial to avoid
biased
representations,
for example when

investing.

Representation vs. reality

Painting reality with one's own brush.


That "senses + mind" process filters how people represent the reality.

There is quite often small - or large - differences between real facts and
how people (either individually or collectively, as seen below) represent them.

The human mind, confronted with new facts,

1) In a first step, receives from the senses a (more or less exact)
    perception of those facts.


2) In a second step (which can be nearly simultaneous), processes
    them
.

This uses rational or emotional, objective or subjective,
simple or elaborate analysis criteria,


3) As an end result, categorizes, pictures and qualifies them

(with a name, a picture, a symbol, a model / belief, a
definition, an
allegory...)

Here there are two possibilities:

In some cases a mental model, either full fledged or schematic, 
  is built.

It is supposed to match the phenomena and show relations
with
other known facts / representations.

Or more often those facts are directly labeled / sorted

within an existing model (representativeness heuristic)

Distortions might happen at any of those steps.

For example:

The perception can stay at the first impression without looking for additional 

data: see (availability) heuristic.

The representation often derives into an oversimplified model:

see (representativeness) heuristic).

Also the perception / representation can vary widely with people:

A country house can be seen as a villa or a hunter's cabin.

All depends how the real estate seller describes it
and how the buyer sees it (see also "framing").

The human brain is an artist with many gifts. It can paint reality to fit
all tastes
and fantasies: figurative, abstract, surrealistic, minimalist,
impressionist, heroic, romantic, you name it.

Why such - minor or large -
     representation distortions?

Why do painters miss, change or add things
within the landscape?


Sometimes the distortion between realities and representations is minor and
does not alter behaviors.

In other cases we have clearly biased representations
(misrepresentations or even phantasms),

Those errors can come from:

Either cognitive anomalies (from simple lack of attention to 
   cognitive dissonance),

A well studied representation bias is the representativeness
heuristic
(see the article below).

Or emotional ones (pain, pleasure, wishes, fears...).

Also, some misrepresentations are produced by external influence, sometimes 
in the form of
voluntary disinformation / manipulation that hide or disguise
the truth (see "deception").

Here, neuro-linguistic (see that word) could be one of the tools.

Social representations, and incidence
     of representations on financial valuations

Individual and collective painting
of what is seen as value.


Social representations
are representations that are common to a whole
group of people, for example a common name given as a bundle
to diverse phenomena.

This might lead to common stereotypes.

In economic / financial matters, personal as well as social mental
representations, have an effect on how people value things and
make decisions.

Thus a misrepresentation (see representativeness heuristic)

can distort investment decisions

When it contaminates the bulk of investors, it creates

market anomalies
(in prices / returns).

An example of the effects of social representations on market prices is the
stock image coefficient (see "image").

It measures the stock perception / representation by market players.

It shows the idea - either conscious or unconscious, too high or too low -
that investors can have about the qualities or the risks / defects of a stock,
which skew their analysis (see "expectancy bias").

Representativeness heuristic

See heuristic, representation

This is a short definition,
     find more details in the "heuristic" article.

Representativeness heuristic is a cognitive bias that uses an oversimplified
method to analyze a situation by assigning it to
a general category (stereotype)
of apparently similar situations or patterns.
Such a  pattern might be either real or illusory, and when real either relevant or
not to the situation

  Also some routine rule on how to react in such cases might be associated to it.

(*) To find those messages: reach that BF group and, once there,
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This page last update: 26/08/15   

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