Behavioral finance FAQ / Glossary (Unintended)

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

Unintended consequence

04/06i + 05/1i + see perverse
effect, moral hazard,
winner's curse, expectation

Oops, this is not what we planned!

How come it backfired?

Or gave a bonanza?


The so-called "law of unintended consequences" states that many decisions,
actions, regulations, sanctions give unexpected results.

Those outcomes strikes either in addition to - or instead of - the intended

There are either positive or negative surprises .

Well, the "law" was devised to incite to be aware of the possible negative
, as such bad effects seem deviously to be the most frequent and they
could kill initial good, but naive, intentions.

When it is compounded by the group

Blunders or good surprises, are found
at ground level and at the top.

Individual or group's poorly prepared "culinary attempts" bring good or bad
outcomes, wonderful or terrible stews.

We find such surprises in:

Individual decisions and actions :

Their unexpected / undesired effects are usually limited.

The Titanic's goof did not change fundamentally seafaring.

Collective moves by important groups and their

   leaders. ( businesses, country or local institutions...)

They can have major and far-reaching consequences for the whole

Why those surprises?

Is it an inattention by the cook ? Or an erratic stove?
Or a failure to imagine several steps ahead,
to think about the consequences of the consequences.

If those decisions have effects that were not predicted, as if a bug
interfered, it is usually because of

   1) People's mental limitations
   2) and - well, there can be some excuses - their general environment.

1) People's limitations

As we are here in a human field, and as people are fallible,
unintended effects
are often caused by:

Cognitive limitations and emotional biases by

Well, this glossary gives a long list (see "bias").

The urge to find solutions (even not well thought gut
   reactions), to implement ideas (and in some cases blind dogmas),
   or just to feel active.

In that case we can neglect (or not have enough time):

To analyze closely enough the various sides of situation,

To wonder about the possible consequences of our

decisions, and what to do about them.

Even possible good outcomes need preparation so as to
use them wisely.

To leave open
    some escape doors or adaptation leeway .

To do some prior testing on a small scale,

beforea full implementation.

2) The general environment.

The cause here can be the general complexity
of the world. It creates:

An information overload and an extreme abundance of choices.

Fast changing situations and general uncertainty
   (see that word).

The evolution and reactions of such a "dynamical system" (see that
phrase) are
sometimes non linear and chaotic.

In a complex and unstable environment, the effects of decisions
are difficult to foresee (unforeseen consequences), whence the
deciders' mistakes.

And what kinds of surprises?

Unintended smiles or tears.

Unintended effects are:

Either positive outcomes

(serendipity, windfalls)

Or sources of new problems

(Murphy's law, winner's curse)

Or definitively self-defeating and disastrous

outcomes (perverse effects, opposite

results to those looked for).

Unintended consequences
     in economics and financial matters

Unintended riches or losses.

1) In economic matters, unexpected effects of decisions from 
businesses or public bodies can often be found in the form of (see in the
the words used below):

(positive / negative) externalities: good or bad consequences for

Moral hazards (see "moral"): opportunities to take unfair personal
of ill-conceived systems or decisions, at the detriment

of other people:

2) In financial matters, such counterproductive consequences take
                place also.
An example:

Who knows with certainty what will happen if a central bank cuts
its interest rates
All will depend of the economic / financial players' reactions.

Will that move bring, please make your bets:

Higher and more persistent growth, as is the usual intention

(more consumption and more business investment)?

Or more hoarding?

Or more inflation?

Or financial overleveraging and an asset price bubble?

Actually, central banks must be prepared to any of those reactions,
every one is a possibility ! To manipulate interest rates, usually
under the pressure of political and economic agents, is like horse
race betting.

The "winner's curse" glossary article gives other examples.

(*) 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: 24/08/15  

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