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Market Psychology & Behavioural Finance

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Market Psychology & Behavioural Finance

Gambler's Fallacy

The belief that an independent random outcome is due to reverse after a run in one direction.

Test: the predicted probability of the next outcome changes on the basis of prior independent outcomes qualitative Market Psychology & Behavioural Finance

Greater Fool Theory

The idea that an overpriced asset can still be bought profitably if someone else will pay more for it.

Test: the purchase is justified by an expected resale price rather than by the asset's own cash flows or utility qualitative Market Psychology & Behavioural Finance

Greed

The desire for larger gains that leads investors to take risks they would otherwise decline.

Test: position size, leverage or concentration rises without any change in the analysis that justified the original exposure qualitative