Behavioral finance FAQ / Glossary (Weak signal)

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

images/images/pi-arrig.gif Weak, neglected, overlooked signal



00/8i,9i,10i + see attention,
information, salience,
under-
reaction, (narrow) framing,
cognitive dissonance, cognitive
overload, signal, noise + bfdef2

At first, the crime experts overlooked a few weak traces of blood
on the big ketchup stain
on the crimson sofa.

They detected it only after bringing their special spray and magical lamp.

Then they focused their enquiry on a suspect perverse enough to prefer
that flashy red sauce on its beef instead of tasty béarnaise.


Definition:

A weak signal (see signal) is a piece of information that
hardly breaks through the surrounding "noise".


Most people do not notice it among the "newsflow", or do not take it into
account,

even if it reveals facts that might have crucial consequences.

Detecting weak signals

Sensitive antennas and anticipative mind.

Just sneak into the restaurant kitchen to see
what they don't tell on the menu.


Weak signals, and more generally the strength of signals, are an information
theory notion, routinely applied for example in electronics.

Things get more tricky when this notion is applied to the human ability to
find one's
way in the information jungle.
To detect and use weak signals so as to anticipate evolutions,
however crucially needed for decision making, is more an art
than a science.


To find traits that separate weak signals from "noise" what are mostly
available are narrative methods 
(of course "big data" by processing
huge quantities of data might also help detect
new unsuspected trends)

Such detection tricks à la Sherlock Holmes (see below the related
sections)try to identify, describe, categorize them and use them to
anticipate evolutions


Here are some hints:

Usually, people have a
"selective attention" (*)
that focuses on:

As a negative result,

they tend to overlook:

Facts, events, news, ideas
- either true or false -

That are the most salient, visible,
   repetitive,
popular or mediated,

Or have (seemingly) immediate
   consequences,

Or are linked to common beliefs,
   prejudices,
worries, wishes, with
   an
emotional more than rational
   impact.

Other isolated information
   (weak
or peripheral or

underground signals)
that might have farther-
reaching effects than eye-
catching ones.

Also longer term issues,

that are less under the
spotlight.


(*) See the "selective" article of the glossary


Not enough people perceive those crucial - but not salient - signals or act
upon them (see underreaction).

Those information do not break through the "percolation threshold"
(see that phrase) which would make them widely known and integrated in
decisions.

The various motives why "weak signals"
     are often neglected by the receiver

Forgot your glasses? Just look closer!


Neglecting weak signals can be due to:

1) A deliberate choice

The costs and efforts needed to get good information and
   process them.

There is some rationality in skirting that task.

But to leave it to professionals, with more investigation means and
abler to understand new phenomena, gives them an advantage
on the general public.

2) A simple neglect or inability

A lack of attention, It is related to (see those phrases)

* a personal attention anomaly

* or a simple routine / automaticity.

* or a cognitive overload,


A lack of curiosity and a lazy preference for simplified
   and superficial
explanations (availability heuristic,

representativeness heuristic).

That makes look the wrong way and be reluctant to integrate hardly
perceptible and ambiguous signals that would reveal that things are
more complex and  contradictory or just ...different because new
factors came into play (*)

(*) An example is how the US monetary authorities in the
    
years 2000s judged inflation as tamed, and encouraged
     easy lending
not realizing price rises moved to other areas

(housing bubble) where the danger was much worse.


A lack of appropriate knowledge to appreciate the relevance
   of the information.

3) A matter of influence

An anchoring on old facts, on ingrained beliefs (cognitive
   dissonance
)
on old estimates.

Also, paradoxically, if a previous decision was made too early instead
of waiting for more data, the tendency is to get anchored on it (or
committed to it), even if the new
data show otherwise.

Here it is overreaction that is followed by underreaction.

A resistance to change, conservatism bias, status quo bias, or

simple prudence waiting for confirmation (see delaying tactics),
and so on.

mimicry / conformity (herd instinct) and peer
  pressure
(fear to be wrong ...alone).

Identifying those signals, but filtering them also

  Anticipating signals, and sorting false signals out.

A) Anticipating and detecting

A wise personal discipline is to be attentive to any information
that might signal a change
of situation, however weak and
contrary to our beliefs that information is.

A useful practice is to prepare beforehand a list of what can
    alter situations.

Here is an example about prospective financial analysis.

No need to be paranoid, some of those changes will never happen,
some will, some others cannot even be imagined.

But it helps to have a future-oriented mind, if only not to live in the
past.

B) Sorting the good and bad grains

But whatever the interest of such signals, let us beware of two drawbacks:

To see a relevant signal in whatever minor event, without
  
digging further might lead to take mistakenly any noise (see
   that word)
as an incentive to act.

 => This would result in sterile hyperactivity, by changing decisions all  the
       time.

Some "informers" might play on the sensational, and on immediate
   instincts / emotions,
so as to hide the real issues.


In such cases, wrong but spectacular and emotion-laden signals
are red herrings used as tools of manipulation, political
decoys for example.

Conjurers or trickster are known to use that baiting technique
also.


Another trick is to send subtle, more subliminal signals, that play on
emotion
.

They could be called bogus weak signals, weak in their form but
with dopamine or adrenaline producing content

Consequence for investment decisions

  A Bayesian toe in the water to test the temperature.


A Bayesian adjustment strategy (see Bayesian) would help to take
such signals into account for investment decisions.

One way to do it can be:

1) To take a first small money commitment (what is also called a
     "real
option" ) on them,

2) Wait for some confirmation before putting a higher stake.

Of course this should be done consciously, so as not to be trapped later in
that "foot in the door" (see that phrase).

(*) 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: 20/07/15

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