Behavioral finance FAQ / Glossary (Sentiment)

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

../images/pi-arrig.gif (investor / market) Sentiment

 


00/12i - 01/2i,8i,9d - 03/11i
- 04/1i - 08/3i,6i + see consensus,

bear, bull, under-confidence,
overconfidence, (social) mood,
optimism, emotion, contrarian

The crowd of players has alternating
happy or unhappy visions of market prospects.

They are sentiments that heat or cool the
market temperature.
Beware, observe them they can burn or freeze you!

Definition (sentiment)

What is called a sentiment, let us be romantic, is:

Either a deeply ingrained and rather permanent emotion.

Or paradoxically a temporary happy / sad attitude / mood,
    for example
an optimistic or pessimistic...

surge in blood pressure.

A sentiment can be either individual (see emotions) or collective.
In the later case we have,

* for the whole society, the general social mood (see the "mood" article)

* for business and finance, the market sentiment (see below).

Definition ( market sentiment)

The market sentiment (an aspect of the "market consensus")
is the favorable / unfavorable
collective
mood (*)
that prevails at a given time among investors
and analysts
(**) about future market
price evolutions
.

(*) See "mood"
(**) Yes, analysts succumb also to the general mood, as well as to
        peer pressure.

  They sometimes adjust their conclusions not before, but after
   the market reaction.

  That sentiment can influence the current prices,
  sometimes in contradictory ways.

Paradoxically, an exuberant collective market sentiment might signal the
end of
an uptrend.

No mystery here: when everybody is converted and filled their fridge with
goodies, no more conversions or goodies chasing can take place.

Also all depends how the sentiment translates into actions, this is the
differencebetween what you feel and what you do.

Various opinion polls try to measure periodically that collective
phenomenon.

The market sentiment range

Boom or gloom.

The dominant market sentiment is either, sorry for the platitudes:

Optimistic (bullish)


Neutral / undecided


or Pessimistic bearish) .

Thar cursor has
of course
intermediary
positions (slightly
hopeful or wary...)

It has also
extreme
positions,
(exuberance
or despair)

Where does the market sentiment come from?

What is at work in the collective mind?

Logical circuits and / or emotional fuses?


The sentiment felt about the market is largely intuitive, even subjective.
It comes usually from a mix of:

Cognitive factors (reasoning, memory, imagination) - either rational

    or biased - that affect the understanding and evaluation of the

 economic and financial market current state and future prospects.

Emotions, such as hope, greed, fear, trust,
   distrust
that affect
attitudes and decision-making.

Although considered usually as personal feelings, those happy / gloomy
emotionscan easily become collective (see social mood).

Investors might get conditioned by a sense - or instinct - of belonging
and closeness (mimicry / herding).

Here we meet the Aristotle's "social animal", however reductive that
exalted thinker was in limiting men to herd animals.

Relation between market sentiment

and general social mood

Do happy or unhappy people
make happy or unhappy markets?

Some theoreticians of social mood (see the "mood" article) see
the market sentiment as related to waves of collective happiness and sadness,
pain and pleasure
, confidence or worry, not just on financial matters.

It was said that the French victory in a World soccer cup added a
few decimal points to the economic growth that year.

Some "effects" (anomalies) such as the sunshine effect, calendar
effects... (see those phrases) are also related to social mood.

Can we thus consider that stock prices reflect the
people mood
more than economic fundamentals?

Although there is some truth in this, it is not fully certain that
investors
* buy stock just because they feel good and happy.
* or sell them in bouts of depression.

* or even that rising stock markets make them blissful (the so
   called "wealth effect") and falling prices give them the blues.


But people, and among them investors, might become:

Overconfident in their own ability - thus not only

in market prospects - when they feel happy /
optimistic / hopeful,

Underconfident when feeling depressed,
   pessimistic,afraid.

Note: some advisers pretend that they can predict social mood cycles,
by using a series of mathematical market price "waves".

Investors should be cautious about such fringe theories that verge on
the
esoteric.

Changes in market sentiment
     and related market incidences

The sentiment might lose steam, or the flame backfire.
Watch the pressure dial!

Most of the time, the market sentiment changes not suddenly, but
step by step, 
because of mental resistance

(see anchoring, under- / over- reaction, habit).

The investors' optimism (the "parachute of hope")
or pessimism (the "wall of worry") takes time to fall
from 80% to 20 % of the population.

It takes a while for a trend to start, to develop, to reach

extremes, and to cease ...for the next trend to start.

We have here the rather usual underreaction - adjustment - overreaction
process
(see overreaction).

Even violent crashes not only tend to come late. This is because the
imbalances(for example a general overleverage and/or
overpricing) take times to beaccepted, but they do not "purge" fully
and immediately
the market of its mispricings.

When this 20/80 ratio is at last reached, it can be called a
consensus (see that word), in the sense of a saturated and
instable belief
.

Such a high level of bearish or bullish mood is often
considered
, at least by "contrarians" (see that word),
as a forewarning of an impending turning
point
of market prices in the other direction.

Note: this article can be considered as a specialized application

(to markets) of the "mood" and "consensus" articles.

(*) 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: 30/07/15            

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