Glossary

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Behavioural Economics Related Terms

Sunk-cost fallacy
 

Sunk cost fallacy is the tendency of people to irrationally follow through on an activity that is not meeting their expectations because of the time and/or money they have already spent on it.

Cognitive bias
 

Humans are prone to reacting to irrelevant information in an illogical fashion. This can lead investors to make poor decisions. It is a result of the fact that the human mind is prone to making snap decisions to save processing power, but these snap decisions are frequently not the optimal choice when it comes to investing.

Before behavioural finance took the centre stage, it was thought that humans were rational utility maximisers, however factors such as loss aversion and fear of missing out have highlighted the fallacy of this assumption. The emotional nature of investing remains an issue which investors and their managers must remain aware of.

Analysis paralysis
 

Analysis paralysis is the state of over-thinking about a decision, to the point where a choice never gets made, thereby creating a paralysed state of inaction.

Bull & Bear Markets
 

A Bull Market is typified by market confidence. Rising prices and a high volume of day to day trading are good indicators of a bull market. There are usually more buyers in the market than sellers and this leads to stock prices rising over time.

A Bear Market is typified by diminishing stock prices with a disparity between increased levels of stock sales and a lack of buyers in the market. This pushes prices down.

Bull and Bear markets tend to be cyclical. Recent examples of a bull market are the periods from 1993-1997 or 2001-2007. Bear market examples can be typified from examples such as: The dotcom bubble in 2000-2001 and the financial crisis in 2007-2008.

Glossary