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Home , Ambiguity effect, Attentional bias, Attribution bias, Authority bias, Automation bias, Belief bias

Glossary of Behavioural

Actor-Observer Overemphasizing the infuence of rather than the situation in explaining the behaviour of others Effect Avoiding options for which missing makes the seem unknown Anchoring Te decision-making process relies too heavily on the frst piece of information acquired Anthropic Bias Biased evidence as a result of observation selection efects Anthropomorphism Characterizing animals, objects and abstract concepts as possessing human-like traits, emotions and intentions Recurring thoughts afecting perception Attributing greater accuracy to the opinion of an authority fgure Bias Depending excessively on automated systems Availability Cascade beliefs becoming more plausible by virtue of repetition Availability Overestimating the likelihood of events with greater avail- ability in Backfre Effect Reaction to disconfrming evidence by strengthening prior pre- vious beliefs Doing or believing things that others do or believe Barnum Effect See Forer Efect

© Te Editor(s) (if applicable) and Te Author(s) 2017 163 I. A. Moosa and V. Ramiah, Te Financial Consequences of Behavioural Biases, https://doi.org/10.1007/978-3-319-69389-7 164 Glossary of Behavioural Biases

Base Rate Ignoring general information, choosing instead to focus on specifc information Base Rate Neglect See Bias Te logical strength of an is biased by the believability of the conclusion Belief Revision See Beneffectance Perceiving oneself as responsible for desirable, but not undesir- able, outcomes Ben-Franklin Effect Doing someone a favour is more likely to trigger another favour than receiving a favour from that person Berkson’s Paradox Misinterpretation of statistical involving condi- tional Better-than-Average Effect See Seeing oneself as less biased than other people and identifying more biases in others Bikeshedding See Triviality Bizarre material is better remembered than common material Cheerleader Effect Appearing more attractive in a group than in isolation Childhood Te retention of few from before the age of four Choice-Supportive Bias Believing that one’s choices are more informed than they were when they were made Clustering Overestimating the importance of small runs, streaks or clusters in large samples of random data (seeing patterns when there are no patterns) Remembering something that never actually happened Confrmation Bias Focusing on information that confrms prior beliefs Testing hypotheses directly without considering possible alternatives Assuming that specifc conditions are more probable than general ones Conservatism Reluctance to revise prior beliefs in response to the availability of new information Consistency Bias Incorrectly remembering past attitudes and behaviour as resembling current ones Context Effect Out-of-context memories are more difcult to retrieve than in- context memories Continued Infuence Effect Believing previously learned misinformation even after it has been corrected Glossary of Behavioural Biases 165

Contrast Effect Enhancing or reducing a certain perception’s stimuli when compared with a contrasting object Courtesy Bias Presenting an opinion that is more socially valid or acceptable than one’s true opinion Cross-Race Effect People of one race fnding it difcult to identify members of another race A memory is mistaken for imagination Current Moment Bias See Better-informed people fnd it difcult to think about problems from the perspective of less-informed people Declinism Believing in the tendency towards decline by thinking favourably of the past Decoy Effect Someone who is indiferent between options A and B prefers B when option C is presented Defensive Assigning more to a harm-doer as the outcome becomes more severe Déformation Professionnelle Looking at things according to the conventions of one’s own profession without considering any broader point of view Denomination Effect Spending more money of small than large denominations Selling assets that have appreciated in value but not those that have declined in value (selling winners and keeping losers) Regarding two options as more dissimilar when they are evalu- ated simultaneously rather than separately Dunning-Kruger Effect Unskilled individuals overestimate while experts under- estimate their abilities Duration Neglect Disregarding the duration of an episode when its value is determined Claiming more responsibility for the results of a joint action or recalling the past in a self-serving manner Underestimating the infuence or strength of feelings in oneself or others Demanding much more to give up an item than paying to acquire the same item Exaggerated Expectation Real-world evidence turns out to be less extreme than expected Expectation Bias See Experimenter’s Bias Experimenter’s Bias Believing and reporting results that are consistent with the expected outcome of an while disbelieving inconsistent results 166 Glossary of Behavioural Biases

Extreme Aversion Avoiding extremes options Extrinsic Incentives Bias Viewing others as having situational extrinsic motiva- tions and dispositional intrinsic motivations for oneself Fading Effect Bias Te emotion associated with unpleasant memories fades more quickly than those associated with pleasant events False-Consensus Effect Overestimating the degree to which others agree with own views Imagination is mistaken for a memory Focalism See Anchoring Focusing Effect Placing too much importance on one aspect of an event Forer Effect Considering as highly accurate the descriptions of own personality that are in fact vague and general enough to apply to a wide range of people Framing Effect Te conclusions drawn from the same information depend on how it is presented Frequency Illusion A word, a name or another thing that has recently come to one’s suddenly seems to appear with improbable frequency shortly afterwards Functional Fixedness Using an object only in the way it is traditionally used Gambler’s Fallacy Tinking that future probabilities are altered by past events when events are independent Generation Effect Self-generated information is remembered best Google Effect information that can be found easily online Group Attribution Error Believing that the characteristics of a group member are refective of the group as a whole Groupthink See Bandwagon Efect A person’s positive or negative traits spilling over from one person- ality area to another in others’ perceptions of them Hard–Easy Effect Based on a specifc level of task difculty, the confdence in judgments is too conservative and not extreme enough Herd Behaviour See Bandwagon Efect Seeing past events as being predictable at the time of occurrence Hostile Viewing the behaviour of others as hostile when it is not Perceiving coverage as biased against own position Hot-Hand Fallacy Te belief that a person who has experienced success with a random event has a greater chance of further success in additional attempts Hot-Hand Phenomenon See Hot-Hand Fallacy Glossary of Behavioural Biases 167

Humour Effect Humorous items are more easily remembered than non-humor- ous ones Hyperbolic Discounting Making choices that are inconsistent over time—that is, making a choice today and subsequently thinking that it should not have been made Identifable Victim Effect Responding more strongly to one person at than to a large group of people at risk IKEA Effect Placing a disproportionately high value on self-assembled objects, regardless of the quality of the end result Illusion of Asymmetric Insight Te perception that one’s knowledge of their peers is greater than their peers’ knowledge of them Overestimating one’s degree of control over external events Illusion of External Agency Self-generated preferences are considered to be caused by insightful, efective and benevolent agents Illusion of Transparency People overestimating others’ ability to know them and their ability to know others Illusion of Truth Effect Statements that have been heard previously are more likely to be identifed as being true Illusion of Validity Believing that further information enhances predictability even when it does not Perceiving a relationship between two unrelated events or believing in spurious correlation Illusory Superiority Overestimating own desirable qualities and underestimating undesirable qualities A statement is true if it is easy to process or if it has been repeated, irrespective of its actual veracity Information Bias Seeking information even when it cannot afect action Ingroup Bias Giving preferential treatment to those perceived to be members of the same group Insensitivity to Sample Size Under-estimating variation in small samples Irrational Escalation Justifying increased investment in a wrong decision, based on the cumulative prior investment Intentionality Bias Believing that people act without our best interests in mind, intentionally trying to harm us Just-World Hypothesis Believing that the world is fundamentally just, thus rationalizing an otherwise inexplicable injustice as deserved by the victims Lag Effect Learning is greater when studying is spread out over time, as opposed to studying the same amount of time in a single session 168 Glossary of Behavioural Biases

Lake Wobegon Effect See Illusory Superiority Law of the Instrument Having a hammer makes everything look like a nail Less-is-Better Effect Preferring a smaller to a larger judged separately, but not jointly Levelling and Sharpening Memory distortions introduced by the loss of details in a recollection over time Levels-of-Processing Effect Diferent methods of information into memory have diferent levels of efectiveness List-Length Effect As a list becomes longer, the absolute number of items remembered goes up Look-Elsewhere Effect A statistically signifcant observation arising by chance because of the size of the parameter space to be searched Te disutility of giving up something (loss) is greater than the utility associated with acquiring it (gain) Ludic Fallacy Analysing chance related problems with a narrow frame of games Mere Exposure Effect Liking things because of familiarity with them Accumulation of post-event information makes memory less accurate Modality Effect Memory of the last items on a list is greater when the list is received verbally than in writing Modesty Bias Blaming failure on oneself while attributing success to situ- ational factors Money Illusion Tinking in terms of the nominal value of money rather than its real value, which pertains to purchasing power Mood-Congruent Memory Bias Improved recall of information is congruent with one’s current mood Moral Credential Effect A track record of non- leading to subsequent prejudice Moral Luck Ascribing greater or lesser moral standing based on the outcome of an event Naïve Cynicism Expecting more egocentric bias in others than in oneself Naïve Realism Believing that is seen objectively and without bias A greater recall of unpleasant memories compared with positive memories Negativity Effect See Negativity Bias Neglect of Probability Making a decision under uncertainty while disregarding probability Glossary of Behavioural Biases 169

Next-in-Line Effect A person in a group has diminished recall for the words of others who spoke immediately before him or her Failure to contemplate or plan for the consequences of a disaster that has not happened before Not Refusal to use products or knowledge developed outside a group Notational Bias A notation induces the appearance of a non-existent natural law Obsequiousness Bias Altering responses in the direction perceived to be desired by the investigator Observer-Expectancy Effect Unconsciously manipulating an experiment to obtain expected results Judging harmful actions as being worse than equally harmful inactions Bias Overestimating favourable outcomes Ostrich Effect Ignoring an obvious negative situation Judging a decision by its eventual outcome instead of the quality of the decision at the time it was made Outgroup Homogeneity Bias Seeing members of own group as being relatively more varied than members of other groups Overconfdence Bias Excessive confdence in one’s ability to do things and per- form tasks Perceiving vague and random images or sounds as signifcant Pattern Seeking Te tendency to look for patterns to explain an event, when patterns do not exist Peak–End Rule Perceiving not the sum of an experience but the average of how it was at its peak and how it ended Peltzman Effect See Risk Compensation Persistence Unwanted recurrence of memories of a traumatic event Personifcation See Anthropomorphism Bias Overestimating the likelihood of negative outcomes Picture Superiority Effect Concepts that are learned by viewing pictures are recalled more easily than those learned by viewing their written word form counterparts Underestimating task-completion times Positive Outcome Bias See Positivity Effect Older adults prefer positive to negative information in their memories 170 Glossary of Behavioural Biases

Post-Purchase Rationalization Persuading oneself that the purchase of an item was a good idea See Hyperbolic Discounting Primacy Effect Giving more weight to initial than subsequent events Processing Diffculty Effect It is easier to remember information that takes longer to read and is thought about more Pro-innovation Bias Excessive optimism about the social usefulness of an inven- tion or innovation without identifying its limitations and weaknesses Projection Bias Assuming unconsciously that others share the same or similar thoughts, beliefs, values or positions Believing that big events have big causes—hence, extreme events have extreme causes Pseudocertainty Effect Making risk-averse choices if the expected outcome is positive and risk-seeking choices otherwise Reactance Doing the opposite to what someone wants you to do to for the purpose of resisting a perceived attempt to constrain freedom of choice Reactive Devaluation Devaluing proposals on the assumption that an adversary is the Recency Illusion Te illusion that a word or language usage is a recent innova- tion when it has been established for long Regressive Bias Remember high values, likelihoods, probabilities and frequen- cies as lower than they actually were and low ones as higher than they actu- ally were Reminiscence Bump Recalling more personal events from adolescence and early adulthood than from other lifetime periods Overestimating one’s ability to exhibit restraint in the face of temptation Reverse See Reactance Rhyme as Reason Effect Te perception of rhyming statements as being more truthful Risk Compensation Taking greater at higher perceived levels of safety Remembering the past as having been better than it really was Expectations afecting perception Self-Fulflling Prophecy Engaging in the kinds of behaviour that elicits results confrming own beliefs Self-Generation Effect See Generation Efect Glossary of Behavioural Biases 171

Self-Relevance Effect Memories relating to oneself are easier to recall than simi- lar information relating to others Self-Serving Bias Claiming more responsibility for success than failure Sexual Overperception Bias Over-estimating the sexual interest of another per- son in oneself Sexual Underperception Bias Under-estimating the sexual interest of another person in oneself Sociability Bias of Language A disproportionally higher representation of words related to social interactions, in comparison to words related to physical or mental aspects of behaviour In hiring decisions, preference is given to candidates who do not compete with one’s own strengths Social Desirability Bias Over-reporting socially desirable and under-reporting socially undesirable characteristics in oneself Source Confusion Confusing episodic memories with other information Spacing Effect It is easier to recall information if exposure to it is repeated over a long period of time Spotlight Effect Overestimating the extent to which other people notice own appearance or behaviour Preference for things to stay unchanged Stereotypical Bias Memory is distorted towards Stereotyping Expecting certain personal characteristics without having actual information about an individual Subadditivity Effect Judging the probability of the whole to be less than the probabilities of the parts Subject-Expectancy Effect See Observer-Expectancy Efect Subjective Validation Something is true if a subject’s belief demands it to be true Suggestibility Te ideas suggested by a questioner are mistaken for memory Sunk Cost Fallacy See Irrational Escalation Superiority Bias See Illusory Superiority Basing decisions on people or entities that survived some pro- cess while overlooking those that did not System Justifcation Defending the status quo Moving recent events appear more remote whereas remote events more recent Texas Sharpshooter Fallacy Selecting or adjusting a hypothesis following the collection of data, making it impossible to test the hypothesis fairly 172 Glossary of Behavioural Biases

Third-Person Effect Believing that messages have a greater efect on others Phenomenon Te ability to recall parts of an item, or related information, not the whole item Considering oneself to be more varied than others in terms of personality, behaviour and mood Travis Syndrome Overestimating the signifcance of the present Triviality Giving too much weight to trivial issues Ultimate Attribution Error Making an attribution to an entire group instead of the individuals within the group Unacceptability Bias Refusing or evading questions that may embarrass or invade Unit bias Te desire to fnish a given task Valence Effect See Optimism bias Verbatim Effect It is easier to remember the gist of what someone has said than the verbatim wording It is easier to remember an item that sticks out than other items Weber–Fechner Law Finding it difcult to compare small diferences in large quantities Well-Travelled Road Effect Underestimating the time taken to go through famil- iar routes, and vice versa See Optimism bias Worse-than-Average Effect Feeling worse than others at difcult tasks Zeigarnik Effect It is easier to remember uncompleted or interrupted tasks than completed ones Zero-Risk Bias Preference for reducing a small risk to zero over a greater reduc- tion in a more serious risk Zero-Sum Bias Te perception that a situation is like a zero-sum game Index

A 43, 120, 155–159 Anchoring 36, 85, 132, 157 Attachment bias 112, 120 Availability bias 157 D Disposition efect 43, 72, 77–80, 86, 120 B Bandwagon efect 31, 158 Base rate fallacy 158 E Behavioural fnance 5, 18, 28–30, Ecological fnance 5, 43, 126, 127, 40, 78, 86, 126, 127, 132, 133, 131 136, 142, 144–146, 152–154, Efcient market hypothesis 2, 3, 14, 160, 161 18, 21 Emotional biases 32, 152 Emotional fnance 5, 43, 126, 127, C 143–146, 153 Capital structure 3, 154 Environmental fnance 43, 126, 131, CAPM 2, 3, 5–14, 83, 146, 161 160 Cognitive biases 32 Experimental fnance 5, 43, 126, 127, Confrmation bias 17, 31, 132, 156 137–139, 141 Conservatism 43, 54, 84, 158 External attribution 55 Conservatism bias 117, 120

© Te Editor(s) (if applicable) and Te Author(s) 2017 173 I. A. Moosa and V. Ramiah, Te Financial Consequences of Behavioural Biases, https://doi.org/10.1007/978-3-319-69389-7 174 Index

F O Familiarity 43, 103, 113, 114, 120 Overconfdence 32, 43, 46–52, 54, Focusing efect 158 55, 59, 62–65, 75, 98, 100, 117, 119, 120, 132, 139, 157 Overreaction 30, 56, 72, 80, 83, 84, G 86 Gambler’s fallacy 43, 72, 78, 94–96, 98, 99, 120 P Panic 43, 100–102, 120, 130 H Pattern-seeking 157 Herd behaviour 17, 28, 43, 59, 101, Projection 156 102, 120, 128, 132 Proportionality bias 156 Hindsight bias 12, 100, 120 Psychology 4, 5, 28, 29, 62, 127, Home bias 43, 113, 114, 120, 129 132, 136, 141, 152, 160 Publish or perish 17, 153, 154 I Illusion of control 43, 50, 115–117, Q 120 Quantitative behavioural fnance 126, Intentionality bias 156 127, 131–134, 137

L R Loss aversion bias 72–77, 85, 86, 120 28, 77, 117, 142, 160 Representativeness bias 72, 82–86, M 120 Market anomalies 5, 30, 40, 145, 152, 161 S Money illusion 43, 59, 109, 111, Self-serving bias 43, 55–63, 65, 75, 112, 120 120 Status quo bias 64, 79, 103–106, N 120, 129, 137 43, 117–120 Survivorship bias 43, 106–108, 120 Neoclassical fnance 2–5, 8, 21, 22, 28, 29, 37, 41, 77, 83, 86, U 117, 127, 131–137, 142, 144, Under-reaction 28, 30, 56, 72, 83, 152–155, 160, 161 84, 86, 117, 133 Neurofnance 5, 43, 126, 141, 142, 153 Noise trading 48, 63