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Market Psychology & Behavioural Finance

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Market Psychology & Behavioural Finance

Action Bias

The tendency to prefer doing something over doing nothing, even when action has no expected benefit.

Test: activity is undertaken without evidence that it improves the expected outcome qualitative Market Psychology & Behavioural Finance

Analysis Paralysis

The inability to reach a decision because of excessive information gathering and deliberation.

Test: additional information is sought after the point at which it stops changing the decision qualitative Market Psychology & Behavioural Finance

Anchoring Bias

The tendency to rely too heavily on an initial reference number when making subsequent judgements.

Test: estimates shift systematically toward an arbitrary starting value that carries no information about the answer qualitative Market Psychology & Behavioural Finance

Animal Spirits

Keynes's term for the instinctive optimism that drives economic and investment activity beyond what calculation justifies.

Test: investment and risk-taking rise or fall more than changes in measurable expected returns can explain qualitative Market Psychology & Behavioural Finance

Authority Bias

Assigning greater weight to an opinion because of who expressed it rather than because of its evidence.

Test: the persuasiveness of a claim rises with the speaker's status, independent of the reasoning offered qualitative Market Psychology & Behavioural Finance

Availability Bias

The tendency to judge probability by how easily examples come to mind rather than by actual frequency.

Test: perceived likelihood tracks the vividness and recency of remembered examples rather than base rates qualitative Market Psychology & Behavioural Finance

Base Rate Neglect

Ignoring the underlying frequency of an outcome when assessing a specific case.

Test: a judgement uses case-specific detail while disregarding how often the outcome occurs in the relevant population % Market Psychology & Behavioural Finance

Behavioural Finance

The study of how psychological factors cause investors and markets to depart from purely rational decision-making.

Test: the observed behaviour departs systematically from what expected-utility maximisation would predict, in a documented and repeatable direction qualitative Market Psychology & Behavioural Finance

Capitulation

The point in a decline at which remaining holders abandon their positions, typically on heavy volume.

Test: a sharp price fall on unusually high volume, accompanied by broad negative sentiment and heavy redemptions qualitative Market Psychology & Behavioural Finance

Confirmation Bias

The tendency to seek and favour information that supports an existing view while discounting information that contradicts it.

Test: evidence supporting the held position is sought and accepted readily, while contrary evidence is scrutinised or dismissed qualitative Market Psychology & Behavioural Finance

Contrarian Investing

Deliberately taking positions against prevailing sentiment, on the argument that consensus is already in the price.

Test: the position is taken because sentiment is one-sided, with an independent basis for believing the consensus is wrong qualitative Market Psychology & Behavioural Finance

Data Mining

Searching data for patterns until something appears significant, without a prior hypothesis.

Expected False Positives = Number of Independent Tests x Significance Level ratio (x, times) Market Psychology & Behavioural Finance

Disposition Effect

The tendency to sell winning positions too early and hold losing positions too long.

Test: the proportion of gains realised exceeds the proportion of losses realised, across a portfolio over time qualitative Market Psychology & Behavioural Finance

Dunning-Kruger Effect

The tendency for people with limited competence in a domain to overestimate their ability in it.

Test: self-assessed ability is highest relative to actual ability among the least skilled, because assessing skill requires the skill itself qualitative Market Psychology & Behavioural Finance

Endowment Effect

The tendency to value something more highly simply because one owns it.

Test: the price demanded to sell an item exceeds the price the same person would pay to buy it qualitative Market Psychology & Behavioural Finance

Euphoria

A state of widespread optimism in which risk is discounted and price rises are treated as normal.

Test: rising participation, leverage and new issuance combine with a narrative explaining why traditional valuation no longer applies qualitative Market Psychology & Behavioural Finance

Familiarity Bias

Preferring investments one recognises, treating familiarity as a proxy for safety.

Test: the allocation favours known names or sectors without a corresponding analytical basis qualitative Market Psychology & Behavioural Finance

Fear

The emotional response to potential loss that leads investors to reduce exposure or avoid it entirely.

Test: exposure is reduced or avoided on the basis of recent price movement rather than on a changed assessment of the asset qualitative Market Psychology & Behavioural Finance

Fear of Missing Out

The anxiety of being left out of a rise that others are participating in, leading to purchases made without analysis.

Test: the decision to buy is triggered by others' gains rather than by any assessment of the asset's value qualitative Market Psychology & Behavioural Finance

Framing Effect

The tendency for a decision to change depending on how the identical information is presented.

Test: preferences reverse when the same outcome is described as a gain rather than as a loss, or in different units qualitative 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 Market Psychology & Behavioural Finance

Herd Behaviour

The tendency to follow the actions of a larger group rather than one's own analysis.

Test: the decision follows what others are doing, without independent evidence being gathered or weighed qualitative