Behavioral Finance Glossary

A cognitive bias where individuals rely excessively on an initial piece of information when making subsequent judgments or valuations.

A mental shortcut that estimates the probability of events based on how readily examples come to mind, often biased by vivid or recent events.

A field of study that incorporates psychological insights into financial theory to explain why investors often make irrational decisions and why markets deviate from efficiency.

The practice of designing how options are presented to influence decisions in predictable ways, often used in retirement plan design and financial product disclosure.

The tendency to favor information that supports one's preexisting beliefs while disregarding evidence that contradicts them.

The documented investor tendency to sell appreciating assets too soon and hold depreciating assets too long.

The theory that financial markets incorporate all available information into asset prices, making it impossible to consistently earn risk-adjusted excess returns.

The phenomenon where ownership increases the perceived value of an asset beyond what one would pay to acquire it.

A cognitive bias in which the presentation or context of information influences decision-making, independent of the information's objective content.

The tendency of investors to follow the actions of the majority, often amplifying market trends and contributing to bubbles and crashes.

The tendency to believe, after an event has occurred, that one would have predicted or expected it, leading to overconfidence in future predictions.

The tendency to take greater financial risks with money perceived as recently won profits rather than original capital.

A term popularized by Robert Shiller describing unsustainable investor enthusiasm that drives asset prices above their fundamental values.

The practical constraints that prevent arbitrageurs from fully correcting market mispricings, including costs, risk, and institutional restrictions.

The psychological tendency to feel losses more acutely than equivalent gains, typically estimated at a ratio of roughly 2:1.

The cognitive practice of assigning different values and rules to money based on subjective criteria such as its source or intended purpose, rather than treating it as fungible.

The combination of loss aversion with frequent portfolio evaluation, causing investors who check returns often to demand a higher equity premium than those who evaluate less frequently.

A market participant who makes trading decisions based on biases, emotions, or incomplete information rather than fundamental analysis, introducing noise into market prices.

An investor's excessive belief in the accuracy of their own forecasts and abilities, often leading to overtrading and under-diversification.

A descriptive theory of decision-making under uncertainty, developed by Kahneman and Tversky, that models how people evaluate gains and losses relative to a reference point.

The tendency to overweight recent observations in forecasting and decision-making while underweighting the broader historical record.

The desire to avoid the emotional pain of regret, which can cause investors to delay decisions, follow the crowd, or avoid realizing losses.

A mental shortcut where probability judgments are based on how much an event resembles a prototype, often leading to neglect of base rates and sample sizes.

The tendency to credit personal skill for investment successes while attributing failures to external or random factors.

A preference for the current state of affairs that leads individuals to resist change, even when alternatives offer clear benefits.