Behavioral finance glossary, letter A, peter greenfinch

Behavioral finance FAQ / Glossary (A)

A B C D E F G-H I-L M N-O P-Q R S T-U V-Z

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Ac - Ad

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

Accumulation / Distribution

00/8i,12i + see distribution / accumulation, congestion / (price) cluster, percolation + bfdef3

Active / passive investing

Due to its length, this article is in a separate page of this "A" section of the Glossary

Adaptation / Adaptable / Adaptive (system, economics, market)

02/10i - 04/9i - 05/2i - 06/4i + see dynamical systems, evolutionary economics, chaos theory, percolation

Addiction

00/10i,12d + see overtrading, commitment, willpower, habit

How to resist it?

Addiction is a recurrent compulsion (in its extreme forms categorized as a pathology) and mind dependence which overcome rational thinking and brings damages to the person affected and sometimes to others

Stock trading can become addictive and thus be a psychological disorder like any other.

This could result in "noise trading" / "overtrading" (see those words) which entails:

For the trader, high risks and costs.

In the market, return and price anomalies. At least if the contagion spreads (see herding) to many investors and is exacerbated by greed or fear.

(under- / slow) Adjustment

Due to its length, this article is in a separate page of this "A" section of the Glossary

Administration / administrative behavior

04/9i + see corporate behavioral finance, public choice, principal-agent

Af - Ag

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

Affect, affect heuristic

03/6i + see emotions, sentiment, mood, attitude, heuristic, automaticity

I love it! I hate it!

Definition (affect:): The affect is the conscious part of an emotion (see that word).

Emotions, based on pain and pleasure, in their turn are factors in many decisions.

Definition (affect heuristic): An affect heuristic is an quasi automatic emotional response / reflex (see automaticity bias) or decision, which is linked to the decider's love / hate, or liking / dislike of something or somebody, or to his / her mood (see that word)

It might label its attitude as his "instinct", whatever real nature of the stimulus that influences him.

This emotional behavior might to be illusory and go against rationality. Which can be compounded by the fact that emotions (see that word) tend to have some primacy over reasoning.

For example a doctor or lawyer or detective is hardly neutral when a case is about a member of its family

For investors, this can be a cause of the home bias (see that word).

Examples in investing

According to a well studied example, people, and among them investors, might feel more optimistic when the sun shines!

They react or decide accordingly, for example they feel an impulse to consume or invest.

A good feeling towards a stock (positive affect) might lead to a lower risk perception and a higher benefit perception,

This goes against common market experience by which high return prospects entail usually a higher risk (see risk premium).

(principal-) Agent / Agency theory

08/i,8i,11i - 03/1i + see ethical, moral hazard, perverse incentive

Agent-based model

01/5i - 03/2i,8i,9i,12i - 04/2i - 08/11i + see style

Let us pack all those people inside the computer and see what comes out!

In economics / finance, an agent-based model (or agent model) is a software that simulates the actions (buying / selling) of several types of agents (professionals / general public, etc),

Application to financial markets

When the agents are investors, the simulation takes into account that each category has its style / profile / preference (short term, long term, fundamentalist, "technicalist", follower, contrarian, etc...).

The aim of the simulation is to see how their interactions impact market prices, trends, returns, volatilities... It would help to understand those phenomena, and if possible to predict them.

The snag is that human uncertainty is at play, surprises are always possible and therefore it is not too easy to predict how each category of agent will react to situations without falling into caricatures. Also, the relative weight of the various categories might evolve.

Those models are also one of the tools of microeconomics.

Whatever the difficulties involved, this rising branch of economics has the merit to try to start from field work and ground level realities more than from large equilibriums between aggregate national or international data.

Al-Am

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

Algorithmic trading

See system trading

Alpha coefficient (excess / insufficient return)

00/6d - 01/9i - 02/7i,8i + see (sector) rotation

Does the lottery wheel choose its winners and losers?

Definition: the alpha coefficient measures anomalous asset returns.

Those can be defined as returns that are - rather durably (not just accidentally) - above or below what the standard theories, namely the CAPM and the RWH (see those acronyms) predict.

Let us remind that those theories consider that:

Only differences in risk / volatility, or different "betas", explain differences of returns between assets.

The alpha coefficient appears in the CAPM equation, but is theoretically equal or close to zero in that model.

Therefore, positive or negative" alphas", meaning excess or insufficient returns that would be independent of the risk, would be impossible,

Predictable alphas that would bring superior performances than the market would not exist either,

The random walk hypothesis says you cannot beat the market by predicting the next price moves and returns.

But in practice,

History shows sizeable positive or negative alphas, in certain time frames, or in some sectors or stocks.

The past performances of fund managers in a given period are measured in alphas.

Here, alphas are extra or insufficient returns for their portfolios, compared to the general market performance.

Usually a past performance in a past situation do not guarantee a future performance in a future situation, although some - rare - people might recurrently have more skill (see luck vs. skill) than the average player to adapt their practices.

Alternation (of trends)

00/6i,7d,8i + 01/11i + see cycle, trend + bfdef3

Altruism

08/6d, 09/6d + see ethics, needs, fairness, genetic utility

Moral incentives vs. money incentives.

Altruism, as an interest for other people more than for the self, should not be neglected as a motivation, including in economics

People might do things that they would not do for money just because of altruism, of what they consider fairness and of what they see as the common good .

This does not mean that all moral motivations and "good intents" bring always positive results. Some can be overly emotional and self defeating, and sometimes manipulated.

Ambiguity aversion, ambiguity premium

01/2i + see uncertainty

An-Ap

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

(mental) Anchor / Anchoring

Due to its length, this article is in a separate page of this "A" section of the Glossary

(market) Anomaly

Due to its length, this article is in a separate page of this "A" section of the Glossary

Anticipation

See Bayesian, expectation, fundamental, probability, speculation, betting

Finance and the future are close cousins.

financial operations, investing and borrowing to start with, are bets on the future .

Therefore, an important job that markets, and notably financial markets, are supposed to do for the economy is to:

Determine adequate prices by anticipating, thanks to the "bets" made by their players, the evolution of economic fundamentals.

Also help those players to adapt those anticipations / expectations by taking into account new events that change probabilities (the Bayesian approach).

Can anticipation work?

Can we see farther than the tip of our noise?

It seems that markets anticipate broad evolutions, maybe better than the expert's consensus, but far from perfectly, as some crises have shown.

This anticipation process has some shortcomings:

The general uncertainty of social and human phenomena of course cannot easily be overcome,
But how can you take any initiative in life if you never anticipate, whatever the fog? Anticipation is a main trait of human beings, to renounce it is to be condemned to a vegetative or purely reflexive life.
Anticipating entails some subjectivity from individual investors (and from professional managers also) about the probabilities of future events
This creates wrong or untimely appreciations of returns and risks, which can damage their money management. See all the "biases" cited in this glossary.

It is not only influenced by economic prospects, but also "contaminated" by the financial market evolution itself (see expectation, reflexivity, cascade, mimicry...)

This can foster excesses and crises (see bubble, crash).

APT

See Arbitrage Pricing Theory

Ar - As

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

ARCH / GARCH models

00/6i,10d + see heteroskedasticity + bfdef3

(limited) Arbitrage

(absence of / limits of) Arbitrage opportunity

Arbitrage pricing theory (APT)

Due to their lengths, those article are in a

separate page of this "A" section of the Glossary

Archetype (stock, trader)

00/12i + see profiling, type, prototype, style

An archetype is a common traditional mental reference to represent ideally a given category of things or phenomena (of stocks, of investors, for example...).

While "prototype" is used to describe a new design or phenomenon, archetype refers to old examples, real or invented. Both are found in finance: old categorizations as well as new paradigms.

Aristotle bias

See binary logic, narrow thinking, fuzzy logic, yin yang, reductionism, stereotype

The Aristotle bias, or binary logic, is a reductive way to categorize complex and gradual situations or concepts as either 100% true or 100% false, 100% right or 100% wrong

Artificial Intelligence (AI)

00/7i + see soft computing, genetic algorithm, fuzzy, non linearity

Asymmetry / skew

Due to its length, this article is in a separate page of this "A" section of the Glossary

Atta - Atti

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

Attachment bias

See endowment effect

Attention anomaly, bias, disorder

Due to its length, this article is in a separate page of this "A" section of the Glossary

(common) Attitude

Due to its length, this article is in a separate page of this "A" section of the Glossary

Attr

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

Attractor

00/5d,11i,12d - 01/8i,11i

What if chaos were not totally chaotic?

Attractors are a chaos theory concept that can be applied - metaphorically or directly - to Behavioral Finance.

In financial markets we may call attractor, in the broad sense, any recurrent pattern of market or stock behaviors - either biased or unbiased - that can be quantified.

Those patterns might be real or imaginary depending on circumstances.

Some real market phenomena seem to escape pure randomness and fit some pattern, if not because of "laws of chaos", at least as a result of some behavioral biases

On the other hand, some precautions are needed so as not to "see" illusive patterns (see representativeness heuristic) in all market evolutions.

Examples of "attractors" in finance

Trends, momentums, alternation/cycles,

Specific distribution curves of prices / volatility / returns,

Stock types,

Price levels,

Paradigms of valuation...

Attribution bias / error

00/9i,12i - 01/3i,5i - 02/2i,8i + see rationalization, self attribution, deification / demonification, story + bfdef2

I am OK, you are not OK, or maybe more OK than OK.

Definition:

the attribution bias is the tendency to explain immediately a - pleasant or unpleasant - event, without further analysis, by attributing its responsibility (or at least its origin) to somebody, to some organization or to some category of people.

For example, it is putting the blame, or the credit, on:

An identified person(s), for example the central bank president,

Or oneself (self-attribution, self-serving bias, group-serving bias).

For example, a random streak of luck in financial operations, mostly when the market is favorable, might be considered as due to one's own skill.

In its extreme form,

A biased attribution can take the shape of deification / demonization (see those words),

A self-serving attribution might lead to overconfidence or even narcissism (see those words).

The attribution bias can also be at play when people attribute a pattern to some series or collections of events (see representativeness heuristic).

Au - Az

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

Automaticity, autopilot bias

Due to its length, this article is in a separate page of this "A" section of the Glossary

Availability bias, availability heuristics

See heuristic, primacy

Jumping on the first interpretation.

The availability heuristics is a cognitive bias using an oversimplified decision process based on how easily:

Information is found or recalled,

Or the causes or consequences of a situation are imagined.

See the "heuristic" detailed article.

Careful, you might be judged according to the first impression you give!

(disappointment, loss, risk, regret, uncertainty... ) Averse, Aversion
Aversion, disposition and prospects

Due to their lengths, those article are in a separate page

of this "A" section of the Glossary

(*) To find those messages: reach that Behavioral-Finance group and, once you are there, 1) click "messages", 2) enter your query in "search archives".

Members of the Behavioral Finance Group, please vote on the glossary quality at Behavioral-Finance/polls

This page last update: 13/11/09 visits to this page (common counter with previous page Behavioral-Finance Gallery)

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Ac - Ad	Dates of related message(s) in the Behavioral-Finance group ():* *Year/month, d: developed / discussed, i: incidental*
Accumulation / Distribution	00/8i,12i + see distribution / accumulation, congestion / (price) cluster, percolation + bfdef3
Active / passive investing	Due to its length, this article is in a separate page of this "A" section of the Glossary
Adaptation / Adaptable / Adaptive (system, economics, market)	02/10i - 04/9i - 05/2i - 06/4i + see dynamical systems, evolutionary economics, chaos theory, percolation
Addiction	00/10i,12d + see overtrading, commitment, willpower, habit
How to resist it? Addiction is a recurrent compulsion (in its extreme forms categorized as a pathology) and mind dependence which overcome rational thinking and brings damages to the person affected and sometimes to others Stock trading can become addictive and thus be a psychological disorder like any other. This could result in "noise trading" / "overtrading" (see those words) which entails: For the trader, high risks and costs. In the market, return and price anomalies. At least if the contagion spreads (see herding) to many investors and is exacerbated by greed or fear.
(under- / slow) Adjustment	Due to its length, this article is in a separate page of this "A" section of the Glossary
Administration / administrative behavior	04/9i + see corporate behavioral finance, public choice, principal-agent

Al-Am	Dates of related message(s) in the Behavioral-Finance group ():* Year/month, d: developed / discussed, i: incidental
Algorithmic trading	See system trading
Alpha coefficient (excess / insufficient return)	00/6d - 01/9i - 02/7i,8i + see (sector) rotation
Does the lottery wheel choose its winners and losers? Definition: the alpha coefficient measures anomalous asset returns. Those can be defined as returns that are - rather durably (not just accidentally) - above or below what the standard theories, namely the CAPM and the RWH (see those acronyms) predict. *Let us remind that those theories consider that: Only differences in risk / volatility, or different "betas", explain differences of* returns between assets. The alpha coefficient appears in the CAPM equation, but is theoretically equal or close to zero in that model. Therefore, positive or negative" alphas", meaning excess or insufficient returns that would be independent of the risk, would be impossible, Predictable alphas that would bring superior performances than the market would not exist either, The random walk hypothesis says you cannot beat the market by predicting the next price moves and returns. But in practice, History shows sizeable positive or negative alphas, in certain time frames, or in some sectors or stocks. The past performances of fund managers in a given period are measured in alphas. Here, alphas are extra or insufficient returns for their portfolios, compared to the general market performance. Usually a past performance in a past situation do not guarantee a future performance in a future situation, although some - rare - people might recurrently have more skill (see luck vs. skill) than the average player to adapt their practices.

Alternation (of trends)	00/6i,7d,8i + 01/11i + see cycle, trend + bfdef3
Altruism	08/6d, 09/6d + see ethics, needs, fairness, genetic utility
Moral incentives vs. money incentives. Altruism, as an interest for other people more than for the self, should not be neglected as a motivation, including in economics People might do things that they would not do for money just because of altruism, of what they consider fairness and of what they see as the common good . This does not mean that all moral motivations and "good intents" bring always positive results. Some can be overly emotional and self defeating, and sometimes manipulated.
Ambiguity aversion, ambiguity premium	01/2i + see uncertainty

An-Ap	Dates of related message(s) in the Behavioral-Finance group ():* Year/month, d: developed / discussed, i: incidental
(mental) Anchor / Anchoring	Due to its length, this article is in a separate page of this "A" section of the Glossary
(market) Anomaly	Due to its length, this article is in a separate page of this "A" section of the Glossary
Anticipation	See Bayesian, expectation, fundamental, probability, speculation, betting
Finance and the future are close cousins. financial operations, investing and borrowing to start with, are bets on the future . Therefore, an important job that markets, and notably financial markets, are supposed to do for the economy is to: Determine adequate prices by anticipating, thanks to the "bets" made by their players, the evolution of economic fundamentals. Also help those players to adapt those anticipations / expectations by taking into account new events that change probabilities (the Bayesian approach). *Can anticipation work?* Can we see farther than the tip of our noise? It seems that markets anticipate broad evolutions, maybe better than the expert's consensus, but far from perfectly, as some crises have shown. This anticipation process has some shortcomings: The general uncertainty of social and human phenomena of course cannot easily be overcome, But how can you take any initiative in life if you never anticipate, whatever the fog? Anticipation is a main trait of human beings, to renounce it is to be condemned to a vegetative or purely reflexive life. Anticipating entails some subjectivity from individual investors (and from professional managers also) about the probabilities of future events This creates wrong or untimely appreciations of returns and risks, which can damage their money management. See all the "biases" cited in this glossary. It is not only influenced by economic prospects, but also "contaminated" by the financial market evolution itself (see expectation, reflexivity, cascade, mimicry...) This can foster excesses and crises (see bubble, crash).
APT	See Arbitrage Pricing Theory

Ar - As	Dates of related message(s) in the Behavioral-Finance group ():* *Year/month, d: developed / discussed, i: incidental*
ARCH / GARCH models	00/6i,10d + see heteroskedasticity + bfdef3
(limited) Arbitrage (absence of / limits of) Arbitrage opportunity Arbitrage pricing theory (APT)	Due to their lengths, those article are in a separate page of this "A" section of the Glossary
Archetype (stock, trader)	00/12i + see profiling, type, prototype, style
An archetype is a common traditional mental reference to represent ideally a given category of things or phenomena (of stocks, of investors, for example...). While "prototype" is used to describe a new design or phenomenon, archetype refers to old examples, real or invented. Both are found in finance: old categorizations as well as new paradigms.
Aristotle bias	See binary logic, narrow thinking, fuzzy logic, yin yang, reductionism, stereotype
The Aristotle bias, or binary logic, is a reductive way to categorize complex and gradual situations or concepts as either 100% true or 100% false, 100% right or 100% wrong
Artificial Intelligence (AI)	00/7i + see soft computing, genetic algorithm, fuzzy, non linearity
Asymmetry / skew	Due to its length, this article is in a separate page of this "A" section of the Glossary

Atta - Atti	Dates of related message(s) in the Behavioral-Finance group ():* Year/month, d: developed / discussed, i: incidental
Attachment bias	See endowment effect
Attention anomaly, bias, disorder	Due to its length, this article is in a separate page of this "A" section of the Glossary
(common) Attitude	Due to its length, this article is in a separate page of this "A" section of the Glossary

Attr	Dates of related message(s) in the Behavioral-Finance group ():* *Year/month, d: developed / discussed, i: incidental*
Attractor	00/5d,11i,12d - 01/8i,11i
What if chaos were not totally chaotic? Attractors are a chaos theory concept that can be applied - metaphorically or directly - to Behavioral Finance. In financial markets we may call attractor, in the broad sense, any recurrent pattern of market or stock behaviors - either biased or unbiased - that can be quantified. Those patterns might be real or imaginary depending on circumstances. Some real market phenomena seem to escape pure randomness and fit some pattern, if not because of "laws of chaos", at least as a result of some behavioral biases On the other hand, some precautions are needed so as not to "see" illusive patterns (see representativeness heuristic) in all market evolutions. *Examples of "attractors" in finance* Trends, momentums, alternation/cycles, Specific distribution curves of prices / volatility / returns, Stock types, Price levels, Paradigms of valuation...
Attribution bias / error	00/9i,12i - 01/3i,5i - 02/2i,8i + see rationalization, self attribution, deification / demonification, story + bfdef2
I am OK, you are not OK, or maybe more OK than OK. Definition: the attribution bias is the tendency to explain immediately a - pleasant or unpleasant - event, without further analysis, by attributing its responsibility (or at least its origin) to somebody, to some organization or to some category of people. For example, it is putting the blame, or the credit, on: An identified person(s), for example the central bank president, Or oneself (self-attribution, self-serving bias, group-serving bias). For example, a random streak of luck in financial operations, mostly when the market is favorable, might be considered as due to one's own skill. In its extreme form, A biased attribution can take the shape of deification / demonization (see those words), A self-serving attribution might lead to overconfidence or even narcissism (see those words). The attribution bias can also be at play when people attribute a pattern to some series or collections of events (see representativeness heuristic).