The most important terms in behavioral finance
This behavioral finance glossary is a helpful preparation guide to CFI’s behavioral finance course.
Relying on the first piece of information that’s encountered as a reference point (or anchor).
Our natural tendency is to listen to people who agree with us. It feels good to hear our own opinions reflected back to us.
Cognitive reflection task test
Judging information by how it was presented rather than at face value. Changes in phrasing, or how the problem was “framed“, can cause investors to change their conclusion.
We are hard-wired to herd. Going against the crowd / non-conformity triggers fear in people.
Prevents us from recognizing our mistakes. We tend to believe that after something happened, we knew about it all along.
More information leads people to believe they can influence the outcome of uncontrollable events.
The tendency to believe that the accuracy of our forecasts increases with more information.
Investors hate losses between 2 and 2.5 times as much as they enjoy equivalent gains.
Stories govern the way we think. We will abandon evidence in favor of a good story. Admired stocks often come with great stories and high prices.
The logical approach to decision-making.
The emotional approach to decision making that is automatic, effortless, and the default option.
The judgment of events by how they appear, rather than by how likely they are.
The tendency to attribute good outcomes to skill and bad outcomes to sheer luck.
This behavioral finance glossary is an excerpt from CFI’s behavioral finance course. To continue learning and advancing your career, these additional CFI resources will be helpful: