Behavioral finance FAQ / Glossary (Social)

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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

Social

~ anomaly

~ behavior

~ bias

~ cognition

~ effect

(general definitions)

See anomaly, collective bias, social
effect, (social) learning,
social
psychology, (social) representation,
(social) utility, cognition, groups,
herding, socioeconomics, behavioral
economics / finance,
(social) mood
+ bfdef2

 

We are not alone.

Definition (social)

Social is usually used as a synonym of "collective".

In mother nature, it applies to life situations played by more than one living
being .

A lot of situations really!

And you guessed it, this article focuses mostly on human beings,
investors among them, more than on bee hives or polar bear
families!

Human evolutions were linked to drastic social evolutions (in
language, knowledge, organization, institutions) that brought a

behavior complexity not found in other species.

However fruitful is that interdependence between man and
society, it could hide some traps as seen below.

Definition (social behavior)

Social behaviors applies to interactions
between similar or related living organisms.

Those relations build a kind of common entity
with its own traits and behavior (*).

For example, economic and financial markets
are important meeting points, among others, of human minds

(*) This does not mean that people are always going in the same
      direction, but the common entity
tends to transcend those
      differences (except when conflicts
become chaotic) and to
      move more or less as a  whole mass.


Behaviors in human groups and societies

Shared thought, shared biases.

This article focuses on:

Shared behaviors inside human social entities

More specifically, their consequences on economics and finance

Let us start with some common definitions on the various phenomena at play:.

Social (*) cognition

encompasses all cognitive
aspects
...


A social (*) (or collective)
   behavior
is one...


A social (*) (or collective)
   bias
is a
cognitive or

emotional flaw...


A social (*) effect is an
    incidence of
psychological

attitudes and behaviors....

...shared, at a

given moment,
by the majority
or a
powerful
portion
of the

members of ...  

 

 

 



 

 

A group,

Or a
    population

segment,

Or a
    society

(organized
group
or
population),

Or a mass,

crowd, etc.

 

 

 

(*) See below : social psychology, social effect,
     social influence, social learning.

Other social phenomena, in which individual interact also with
their group, and are even strongly attracted by it, could
also be defined by taking elements from the above definitions.

Examples of closely similar notions not detailed in this page to avoid
   repetitions:

* social action (= social behavior),

* social anomaly (= social bias),

* social mood (see mood)...

 

Individual minds and collective mind.

Normally, societies belong to individuals.

But what if societies grow their own mind and life?

And behave as if individuals belong to them?

The collective phenomena listed above can make the
group take some control on individual minds and

limit their independence of decisions and
actions.

The same than people get their rationality bounded by individual biases,
they are also submitted to collective psychological phenomena.

In some degree, they get "formatted" by the social magnetic
attraction and pressure
.

A thing that individual and social psychology have shown is that "free
will" exists, but is not absolute.

Those common mental phenomena - some useful, some harmful -
that affect a whole community and take place in various fields of
social life, are:

Either cognitive (implicit or explicit social

codes, common conventions and heuristics, social
learning, social representations, akin to framing:
see that word),

Or emotional (verging sometimes on crazes
   or hysterias),

Or purely automatic (rites, formal or tacit rules...)

This social influence can generate common / conventional wisdom, but
also common biases
.

That makes the outcomes, or social effects (see below)

 in some cases quite fruitful and in others quite damaging.

Those diverse effects are found for example (see social behavior / effects)
on economic and financial markets, as important meeting points
and
playgrounds of human minds.

 

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

Social behavior / effect / influence
   (on finance / economics)


See collective bias, social
psychology, cognition, groups,

socioeconomics,
herding,
behavioral finance + bfdef2

Have investors really independent minds?
And independent pockets?

As a member of the investor crowd, do you share your
mind  and your pockets?
Do you see that common pot of behaviors worthy?


In economics and finance,

* either a small category (market segment),

* or a large mass, of consumers, investors, borrowers or workers

may in various circumstances think and act as a group more than as
isolated individuals taking independent decisions.

When that category of people is large enough and

those behaviors follow a common
direction, they have a decisive effect on market
prices, volumes and returns.

In decisions related to markets, there are two rather opposite
interpretations
of those social effects:

1) Efficient market theorists might admit individual investors biases.

But they argue that the whole market acts rationally.

Their thesis is that statistical averaging make that those biases cancel out.

This law of large numbers would explain a kind of wisdom of the crowd.

And if it is not fully the case, they assume that smart arbitrageurs
with deep pockets smoothens immediately any remaining anomaly.

Now the transcendental question: do deep pockets make
smart?

Or does smartness make deep pockets?

Until now, no scientific evidence of a general law nor even of
a stable correlation!

2) Behavioral economic / behavioral finance theorists see 
     many limits to that collective rationality.


* They admit that crossing individual thinking brings sometimes collective
    wisdom,

* But they are not convinced that economic agents always take their
   decisions as fully wise independent entities or that in average their
   biases always cancel out.

 

They claim that common /conventional thinking leads often to
dangerous contagions

 that result in collective (or social, systematic) biases.

Those biases

Take the form of positive feedbacks, collective under-reactions or
  
overreactions, herding, etc.

Can make the whole market act irrationally, creating mispricing
  
and return anomalies.

Can deviate into collective folly
   (bubbles, panics, crowd hysteria...)

Social learning curve

 


01/12i - 02/8i + see memetics,
conformity, learning, knowledge
acquisition, underreaction
- overreaction, peer pressure,
behavioral finance / economics

Learning from others.

What about your own salt?

An individual learns social behaviors (and some individual behaviors) primarily
byobserving and imitating the actions of other people.

Also common beliefs (conventional wisdom) are learnt from hearing
those people'sinterpretations.

But it takes time before a new information, idea or practice
diffuses / percolates so as to be known or accepted by the majority of a
society (it might be faster in small groups).

Consequences for financial markets

Markets are slow learner

Social influence contradicts the EMH (efficient market hypothesis):

The EMH
supposes that:

While on the
contrary:

All new information is
     instantly 
taken into

account in market
prices.

 

Delays in learning 

process can cause
underreactions in the
short term.

There are other common
     misreactions

Every investor acts
    independently
.

The imitation process

leads  when it persists,
to overreactions

 

 

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

Social psychology

02/11i - 04/3i
+ see social bias / effect

How does the individual mind interacts with the
crowd?

Do we have two minds in one,
the personal one and the common one?


Social psychology is a science, a joint branch of psychology and sociology.

A two ways science

Who leads the score in the individual vs. group match?

Social psychology is a field of knowledge that deals with
social interactions (in groups, crowds...).

It tries to understand and explain
two
"chicken and egg"
kinds of phenomena:

Those two main aspects lead
researchers
to make also
a distinction between:

1) How individuals are
   
influenced, in their thoughts,
   
feelings, and behaviors, by the  

iactual, imagined, or implied
presence of
other beings.

1) Psycho-sociology, or

"psychological" social
psychology, more related
to individual reactions
to other people or to
groups of people,


2) How, conversely, individuals

influence social / collective
phenomena.

2) Socio-psychology, or
    "sociological" social 

psychology, more related
tocollective phenomena
and socialinstitutions.

Incidence on finance and economics
     (see also social effect)

And now the investor vs. market contest.


Most markets depend on the actions of a multitude of buyers and sellers
who influence one another.

This obviously raised questions on how that collective behavior works.

As a first step, some concepts and findings of social psychology gave
a few clues on those market behaviors.

This is how behavioral finance and behavioral economics were born.

Here are the main distinctions made in those areas:

Two levels are identified
(before seeing what
links them):

A practical
distinction
is

found also between:

Also the academic
distinction

between :

1) Investor psychology (and

consumer psychology),

(people who buy assets,
goods)

1)
A (human) bias

1) Psychological

behavioral
economics /
finance

2) The behavior of markets

(the goods themselves,

and their prices)

 

2)
A (market) anomaly

resulting from this bias

2) Quantitative

behavioral
economics /
finance


Social representation

See representation

Social responsibility

Social utility

See ethics, genetic utility,
utility

Socioeconomics,
   economic sociology

05/2i + see
behavioral economics,
evolutionary economics

The economic crowd

Socioeconomics or economic sociology is a field of research that analyses
the relation between social phenomena and the economy, and which:

Is very close to

Thus differs from

"Quantitative BE" (see above the 
table in "social psychology"),
as it is interested in collective - rather
than individual - behavioral traits,

and in their (quantified)
effects on economic and social
evolutions.

"Psychological BE", another
field close to BE,
and from
neuroeconomics
,as those two
other angles of research are more
interested in the
individual
economic decision-making process
than in the collective one.

Sociopsychology

See social psychology

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This page last update: 06/09/15
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