Behavioral finance FAQ / Glossary (M)
Ma
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
Magical thinking, numbers
separate page of this "M" section of the Glossary
00/12i + see mass behavior, bubble
See decision making, model
Mathematical psychology is a field of research that tries to quantify behavioral factors so as to build decision making models.
01/7d,9i + see utility
Me
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
02/8i,11i,12i + see reversion to the mean
02/5i + see risk, volatility
00/11i,12d - 01/3i + see information anomaly, disinformation, manipulation
Just because it is in the news, is it true?
Media are here to inform, but they cannot be always fully reliable, for good or bad reasons. Some information they give do not match realities and therefore distort the truth.
Those screens and skews are more or less frequent and excessive, depending on the "quality" of the media.
Why can media biases take place?
When ink or pixels hides truth.
Many distortions are unavoidable and accidental, but some others are clearly akin to manipulation.
Therefore, information distortions done by media people occur:
by oversimplifications and errors - due either to a lack of time (speed
is essential),
or lack of effort to check, or to an
imprecise knowledge of the topic by the author,
mimicry (copy and paste), and unconscious biases, etc.
neglect in checking, and lack of professionalism in general.
manipulation, disinformation).
00/7d,8i,11i,12i - 05/2i - 07/6i + see common knowledge, viral communication, diffusion, epidemics + bfdef2
What all of us know!
Definition: A meme:
replication from one person to another, and become widely known and used in a society.
That common bit of knowledge self-replicates just like a gene (thus the semantic similarity) or virus (see viral communication).
In finance, the P/E example can be given (see the "common knowledge" article).
of this "M" section of the Glossary
Mi
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
(St Petersburg, Allais...)00/8i
+ see game theory, decision paradoxes + probabilities site link
01/1d + availability heuristic, reputation
Definition: mindshare is a measure of the attention that a population devotes to something.
An example is the percentage of people in a population that have memorized a brand, a firm's name.
This measurement is thus linked to notoriety, fame, perception, image.
Obviously (this is nearly a tautology), customers and investors tend to neglect obscure companies and to be interested in the best known ones (see availability heuristic)
00/5d,6i,8i - 01/4i,7i + see mispricing, anomalies, price anomaly, behavioral biases, value, overpricing, underpricing + bfdef3
Wrong side of the price road?
Definition: a stock price misalignment (or mispricing) is a market anomaly in the form of a deviation
between:
price
models that use
present fundamentals and projected returns and risks data (see "value", "fundamental"...).
In other words, that stock appears then underpriced or overpriced compared with those prospects.
The price alignment concept is also used in other markets (currency prices...)
Of course, some "misalignments" might be only apparent and come from miscalculation, as there is some subjectivity in such calculations,
The conventional
theory (see EMH) says that such discrepancies are speedily corrected.
But in practice, misalignments seem often to persist for a long time, or even amplify. We see it when a trend accelerate or reverse without clear new information.
Collective misperceptions, misreactions and misrepresentations are the main sources of misalignment and mispricing (see below)
See perception, misrepresentation
A mental misperception is a belief or conclusion that is contrary to real facts. See for example "base rate fallacy".
It can be due to a wrong information but also to a misunderstanding by the receiver of the information
See misalignment, anomalies, price anomaly, behavioral biases, value, overpricing, underpricing + bfdef3
01/6i + see over / under-reaction, information + bfdef3
See representation, disinformation
Mo - Mon
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
See crowd behavior
00/12d
00/8i - 01/1i,3i,4i - 02/5i,8i,10i,11i - 03/1i,5i,6i - 04/2i + see cycles, trend following, overreaction + bfdef3
Following the fastest horse.
To the pasture or to the cliff?
trend (see trend)
"trend following" (see that phrase) strategy in asset markets:
Buying what goes up, selling what goes down.
This "follower" practice is rather common in short or medium term money management.
Momentum traders play asset in which a strong price momentum has started and lasted for a long enough number of months.
Typically, they would preferably buy stocks that had the highest
return in the
previous years
and / or sell those with negative returns.
Riding the horse until jumping off
This "follower" strategic thinking is a mental bias in some degree, linked to short memory and rational expectations.
On the other hand, trend spotting might sometimes offer
opportunities. It seems that a trend that had an optimum
time and strength to settle (some will wait for at least one year and a 20% rise or fall) has an above average chance to self replicate in the next period (another year).
The momentum might break without warning
The opposite bias is "gambler's fallacy" (the belief that there will be automatically a reaction in the other direction).
07/7i + see psychology of money
00/6i,12i - 01/7d - 02/11i - 06/2i - 07/7i + see mental account
The shrinking banknote.
Definition: Money illusion is the confusion between "nominal" and "real" values (also called "deflated" or "inflation corrected "values).
It happens when people overlook, in their decisions, elements such as price inflation, or cost comparisons, or (rate of) return benchmarks, between two periods or two kind of operations.
It is a kind of "framing" (see that word) that may give the illusion of getting
richer or poorer. For example:
They might start working more at some better nominal wage, although it is really less in real terms than they were normally willing to work for (wage stickiness).
That belief can make them overpay their home by not seeing that real estate price rise often just compensate inflation and that prices excesses can be followed by price collapses. The subprime crisis took advantage of that bait.
Moo - My
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
See (general, social) mood, (market / investor) sentiment, consensus
of this "M" section of the Glossary
See need, behavior, cognition, emotion
Motivations / drives are what cause behaviors. Except in fully automatic unconscious behaviors (see automaticity, habit...)
Motivations can come from the intellect (cognition) or from emotions. Emotions are the main factors that make people act, but they can override cognition with the risk of irrational decisions.
See (investor / trader) psychology
See mental
(*) 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: 09/03/10 Back to BEHAVIORAL-FINANCE GALLERY
