Behavioral finance FAQ / Glossary (R)

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Ra	Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental
Random, randomness	See distribution, random walk
Random walk hypothesis / RWH	Due to its length, this article is in a separate page of the "R" section of the Glossary
Range estimate aversion	Due to its length, this article is in a separate page of the "R" section of the Glossary
(risk of) Rare events	Due to its length, this article is in a separate page of the "R" section of the Glossary
(Ir-) Rational, (Ir-) Rationality	See rationality
Rational bubble, expectations, bias Rational choice theory		See rational expectation
Rational ignorance			08/3i + see ignorance, cognitive overload, (bounded / near) rationality
(bounded) Rationality (near) Rationality				See bounded rationality
Rationalization, rationalize	Due to its length, this article is in a separate page of the "R" section of the Glossary

Rea - Rec	Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental
Reaction / reactions to info, news, events, signals	Due to its length, this article is in a separate page of the "R" section of the Glossary
Real estate market anomalies / herding / boom	Due to its length, this article is in a separate page of the "R" section of the Glossary
Rebiasing	01/10i,12i - 03/5i + see debiasing, tilting, stock image
Too rational, you said? Missing the human factor? That can be corrected! For investors who are conscious of market biases, rebiasing is a useful second phase after debiasing. Let us remind that debiasing (see the related article) is to spot one's own biases and to adjust one's behavior in accordance, in the financial area, to spot market biases and to adjust valuations in accordance. Rebiasing consists, when dealing with asset markets, while avoiding avoid one's own biases, in reintroducing anticipated market biases so as to take advantage of them. Practically it applies to Asset valuation , by adjusting it with market criteria, for example with a tool such as the stock image coefficient, Trend expectations , by taking into account the underreaction - adjustment - overreaction phenomenon,
Recency bias, effect	See memory
Was there a day before yesterday? Definition: the recency bias is to give more importance to recent events than to older ones. Also called the short memory (see that word), it is a kind of mental myopia that focuses on the most recent information and thus tends to forget or neglect more ancient data and the broader historical picture. A narrow and conflicting mental process Look, we are on a roll, why look back in Ancient History? The recency bias seems to contradict the human tendency to be anchored in the past. But in fact it is anchoring in the recent past, which the mind recalls more easily. A common example in asset markets is the expectation (see that word) that some assets which until now have been   fashionable will keep being popular in the near future. This is neglecting the risk that the business cycles and/or the rotation (see that word) of investor attention might revert the evolution. A risk that could have be seen by looking at what happened regularly in the past. In a society in which information abound, there are conflicting tendencies inside the human memory (see that word): One tendency, which affect short memory is that new information tend to erase or at least to replace previous one in the mindshare (see cognitive overload), Another one, that is linked to long memory is that, on the contrary, people might become vaccinated against new information, They tend to resist it and stay focused on old situations (see anchoring, status quo bias...)

Red - Reg	Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental
Reductionism	Due to its length, this article is in a separate page of the "R" section of the Glossary
Reference point, (mental) reference	See anchoring, loss aversion, availability heuristic, prospect theory
Lucky number? Or obsession? Definition: a mental reference point in a dynamical system (for example a financial market) is some historical data (or other benchmark), often a number, that an observer and /or player choose from which to compare the evolution and the current state of that system. Is it useful and adapted? Running fast, or staying with the feet stuck to the floor? Relying consciously or unconsciously on a mental reference helps to make fast decisions. Also that reference can be common to all observers as a common frame / starting point from which some social / economic evolutions might be spotted Whatever the general usefulness of an initial point to start an analysis or to react fast to a new situation, there can be two possible snags: That reference point can result from anchoring , thus in need to be adjusted to the new real situation, To use systematically a reference point without digging deeper is a   x reductive bias (availability heuristic, framing...). In finance, the reference point, usually as an asset price, is a key parameter in anchoring, prospect theory, loss aversion...(see those phrases).
Reflexive, reflexivity, circularity	Due to its length, this article is in a separate page of the "R" section of the Glossary
Regime switching	04/2i + see percolation, technical analysis, (Markovian) jump
Changing the rev. per minute is Mozart music for motor fans. A switch of regime (an analogy to what happens with a car speedbox) is, when applied to asset markets a crucial change of trend (and of investor attitude / behavior) The trend might switch from bullish / greed to bearish / fear. or experience a strong and sudden acceleration or deceleration of the same trend. Such switching can take the form of a strong discontinuity (Markovian jump, non-linearity...) It often takes place when the downtrend or uptrend crosses a "percolation threshold" (see that phrase). That tipping point where the switch takes place is also called in dynamical system theory the "phase transition point" One of the thing that technical analysts do is to try to detect regime switching. With mixed results.
(overconfidence in) Regulation	Due to its length, this article is in a separate page of the "R" section of the Glossary
Regret aversion / avoidance / minimization. Expected Regret	Due to its length, this article is in a separate page of the "R" section of the Glossary

Rep - Rev	Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental
Repetition errors / mistakes	01/4i, 11i + see persistence, memory
Do they never learn? The efficient market theory sustains that market players correct their mistakes or if not, that some players correct the market blunders of others, through immediate arbitrage. It considers that such corrections / arbitrages would make those biases and mispricing quickly disappear. Until the next blunders by themselves or by others appear, and so on. This overlooks the fact that human behavior, however wise or biased, repeats itself (admittedly with some differences) as seen in the history of mankind and in everyday life. This is because * there is not just reasoning at play: emotions might override it; * also, after some delay, the (collective) memory of previous mistakes fades / decays. For example, even investors who have some knowledge in Behavioral finance, tend to take it as a justification that they are themselves unbiased, not recognizing their own biases.
Reputation (of professionals)	02/9i + see peer pressure, pride
Reputation (of stocks)	See mindshare, availability heuristic, image
Representation, Representativeness heuristic	Due to their lengths, those articles are in a separate page of the "R" section of the Glossary

Resonance	See style of investing
Reversion / reverting / revert (to the mean / to the other extreme)	01/12i - 02/8i,10i,11i + see fat tails, distribution curve, feedback, extremes, gambler's fallacy
Regular or erratic pendulum? In theory, markets self-correct their variation anomalies. Prices are supposed to show a stabilization or a reversion (sometimes called regression) to the mean of the bell curve (see distribution curve). Theoretically also, if we believe in long term efficiency (see that word), the statistical mean would be equivalent to the fair price (see that term). Reversions happen: In prices and returns, But also in volatility / risk perception (when there is low volatility, any important unexpected event can change it to high volatility). In reality: to the mean or to the extremes? Back to the center of the playground? Or going off-limits on the other side? The market works often differently. Reversions happen, that is why contrarians or value investor sometimes show superior investment performance. But the cycle-trend phenomenon shows that market price evolutions have a tendency to persist under a process of: reversion to the extremes This takes place as follows: 1) A positive feedback loop / self-replicating epidemics (vicious circle), exaggerates the amplitude and duration of the price trend, 2) Then prices reach an extreme low or high, 3) And then the trend reverts towards the opposite extreme (positive loop in the other direction)

Ri -Rz	Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental
(financial) Risk (small) Risk (Specific / systematic) Risk	See risk
Risk attitude, aversion, neutral, preference, profile, seeking, tolerance,		See riskattitude
Risk perception			See perception
Risk premium, Risk premia puzzle				See riskpremium

Rogue trader	See narcissism
Rotation (of attention, interest, image)	Due to its length, this article is in a separate page of the "R" section of the Glossary
Round number anchoring	03/11i + see magic numbers, range estimate aversion
Rumor dissemination	03/9i + see epidemic, viral communication weak signal, percolation
RWH	01/9i,11i + Random walk hypothesis (see above)

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

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This page last update: 23/12/09         Back to BEHAVIORAL-FINANCE GALLERY   Disclaimer / Avertissement légal

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