Behavioral finance FAQ / Glossary (Signal)

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This is a separate page of the S section of the Glossary

 

Dates of related message(s) in the
Behavioral-Finance group (*):

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

Signal, signaling



03/9i - 07/3i + see reaction,
information, weak signal,
expectations,
manipulation,
salience, cascade

Signposts show the way ...or confuse the driver.

Definition (signal):

A signal is a piece of information (see that word)

that might create, alter or confirm expectations.


Definition (signaling):

Signaling is to send signals intentionally, hoping to influence
expectations (generally in a favorable way for the sender).


Categories of signals

Many lights and icons on the dashboard.

Use the booklet to recognize them!

The theory of information (see information) shows that every signal has
its own traits:

It can be in its own nature :

Strong or weak (see weak signal, salience, noise..),

Alone or repetitive,

Clear or fuzzy (see fuzzy logic), or ambiguous (it could mean

anything and just add to the uncertainty) or even contradictory

And of course, true or false

(here, better check the consistency by using also other data,
sources, indicators),


As regards the receivers, the signal can:

Weigh differently (relevance, importance; cognitive
     or emotional compatibility ) on different receivers.

Match expectations or not (see surprise)...

Those traits influence the reactions (see "reaction to information").

Of course, a strong, repetitive, clear, important
  
signal has the most effects.

Although some weak - but subtle, nearly subliminal, signals - might
bring effects also.

Better have sensitive antennas!

Of course also, the direction of the effect (for example, when it

    reaches a group of investors, a rise vs. a fall in stock market prices),
    and the time needed
for a full effect, depend how the signal
    matches
expectations.

Often people do not accept, at least immediately, as a reality
a piece of information that contradicts their beliefs and
expectations.
(see cognitive dissonance, underreaction...).

Signaling in finance, management, politics

Signs on the money road.

In economics and finance, signaling is to send deliberate and
           conspicuous
(or on the contrary subtle) signals to the players,

usually in the form of releases of salient events or business

 decisions.

Corrective or misleading?

The sender might consider that people are misinformed and want to paint

them what he considers the right picture and make them adjust
(as far as possible) their expectations.

Sometimes the purpose is less noble or even voluntarily misleading.

In that case signaling is a manipulation tool.

Examples of signaling

In stock markets, some dividend increases or stock splits give 
   clues
to investors about what to expect in the future from
the 
firm or from the
economy.

Paradoxically a non information, such as a uninterrupted absence
of dividend, can be a subliminal signal that the company hope to
use the money more efficiently than if it was given to shareholder.

Also some market moves, even pure noise, are taken as signals
by investors, and they start a chain of other moves (see cascade,
feedback loop...)


In economic policy, a change in interest rate, taxation, regulation
   has an
influence on what economic players could expect.

Incentives (see that word) are signals used not only in

staff management (performance objectives...) but also in politics
(fiscal / social policy) to orientate behaviors.

This is tricky!

Signaling is obviously something delicate to use as the effect of flag waving
and bell ringing depends on the receivers' reactions as seen above.

It might give the intended result, or on the contrary stay unnoticed and
   lost in the sand.

In some cases it might give involuntarily the "wrong signal", and lead to
   perverse effects.

(*) 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: 28/08/15  

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