Behavioral Finance
28 Behavioral Finance terms, defined in plain English — part of the 1345-term Finicade finance glossary. Each one has its own page, and links to the free game that teaches it.
- Anchoring
- Anchoring is letting an initial number disproportionately shape a later judgement, even when it's irrelevant.
- Availability Heuristic
- The availability heuristic judges probability by how easily examples come to mind, so vivid and recent events feel more likely than they are.
- Base Rate Fallacy
- The base rate fallacy is ignoring how common something is in general when judging a specific case.
- Behavioral Gap
- The behavioural gap is the shortfall between the returns a fund reported and what its investors actually earned, from buying high and selling low.
- Choice Overload
- Choice overload is more options producing worse decisions or none at all.
- Confirmation Bias
- Confirmation bias is seeking and weighting evidence that supports what you already believe while discounting what doesn't.
- Disposition Effect
- The disposition effect is the documented tendency to sell winners too early and hold losers too long, because realising a loss makes it feel final.
- Endowment Effect
- The endowment effect is valuing something more highly simply because you own it.
- FOMO
- FOMO is buying because others are making money rather than because of any assessment of value.
- Framing Effect
- The framing effect is choosing differently depending on how identical options are described.
- Gambler's Fallacy
- The gambler's fallacy is believing that independent events self-correct — that a coin which landed heads five times is due for tails.
- Herding
- Herding is following the crowd rather than your own analysis — individually rational when being wrong alone is punished harder than being wrong together.
- Hindsight Bias
- Hindsight bias is the feeling that an outcome was predictable once you know it happened.
- Home Bias
- Home bias is holding far more domestic assets than global market weights justify, driven by familiarity rather than analysis.
- Illusion of Control
- The illusion of control is overestimating your influence over outcomes determined largely by chance.
- Loss Aversion
- Loss aversion is the finding that losses hurt roughly twice as much as equivalent gains feel good.
- Mental Accounting
- Mental accounting is treating money differently depending on where it came from or what it's labelled for, even though money is fungible.
- Money Illusion
- Money illusion is thinking in nominal rather than real terms — feeling richer after a 3% raise in a 5% inflation year.
- Narrative Fallacy
- The narrative fallacy is our compulsion to explain random outcomes with coherent stories.
- Nudge
- A nudge changes how choices are presented to steer behaviour without removing options — a default, a reminder, a reordering.
- Overconfidence
- Overconfidence is systematically overestimating your own knowledge, precision and skill.
- Present Bias
- Present bias is valuing immediate rewards disproportionately over future ones, in a way that reverses your own earlier plans.
- Prospect Theory
- Prospect theory describes how people actually choose under risk: outcomes judged against a reference point, losses weighted more, small odds overweighted.
- Recency Bias
- Recency bias overweights the recent past when forecasting, which is why money flows into funds after they have performed well and leaves after crashes.
- Regret Aversion
- Regret aversion is choosing to minimise future regret rather than to maximise expected outcome.
- Self-Attribution Bias
- Self-attribution bias credits successes to your skill and blames failures on bad luck.
- Status Quo Bias
- Status quo bias is preferring things to stay as they are, so defaults become decisions.
- Sunk Cost Fallacy
- The sunk cost fallacy is letting unrecoverable past spending justify further commitment.