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Behavioural Insights

Investor Definitions

Choice architecture - idea that decision makers do not make choices in a vacuum. They can make them in an environment where many features, noticed and unnoticed, can influence their decisions. The person who creates that environment is a choice architect. See also: Nudges (Source: Thaler, Sunstein & Balz)

Confirmation bias - suggests that investors seek out information that confirms their existing opinions and ignore contrary information that refutes them. This psychological phenomenon occurs when investors filter out potentially useful facts and opinions that don't coincide with their preconceived notions. The phenomenon is a source of investor overconfidence and helps explain why the bulls tend to remain bullish, and the bears tend to remain bearish regardless of what is happening in the market. Confirmation bias helps explain why markets do not always behave rationally. (Source: Investopedia)

Heuristics - "rules of thumb" or mental shortcuts which people use in much of their decision making; often essential for routine tasks and decisions that are made every day but can lead to poor choices and mistakes, particularly for more challenging tasks. (Source: OSC Investor Office Behavioural Insights report)

Homo Economicus - a term that describes the rational human being assumed by some economists when deriving, explaining and verifying theories and models. Homo economicus, or economic human, is the figurative human being characterized by the infinite ability to make rational decisions. Certain economic models have traditionally relied on the assumption that humans are rational and will attempt to maximize their utility for both monetary and non-monetary gains. Modern behavioral economists and neuroeconomists, however, have demonstrated that human beings are, in fact, not rational in their decision making, and argue a "more human" subject (that makes somewhat predictable irrational decisions) would provide a more accurate tool for modeling human behavior. (Source: Investopedia) 

Inattentional blindness - a psychological lack of attention that is not associated with any vision defects or deficits. It may be further defined as the event in which an individual fails to perceive an unexpected stimulus that is in plain sight. When it simply becomes impossible for one to attend to all the stimuli in a given situation, a temporary blindness effect can take place as a result; that is, individuals fail to see objects or stimuli that are unexpected and often quite salient. A famous study that demonstrated inattentional blindness asked participants whether or not they noticed a gorilla walking through a scene of a visual task they had been given. (Source: Wikipedia)

Social distance - based in Construal Level Theory, which suggests that individuals draw on more cognitive and less emotional thought processes when engaging in activities separated by time, space, or social distance from the here and now. Hershield & Kramer's study suggests that the willingness to take financial risk and degree of discounting vary with the amount of social distance between oneself and the decision target. (Source: Hershfield & Kramer's social distance study)

Social pressure/FOMO - the idea that what investors fear most is not the risk of a loss, but the risk that they may do poorly relative to their peers. That means event through investments in areas such as new technology may be particularly risky, investors tend to cluster around such  opportunities to avoid being the only one in the neighbourhood to miss out on the "next big thing". (Source: Graduate School of Stanford Business)

Professional Definitions

Behavioural insights - An inductive approach to policy making that combines insights from psychology, cognitive science, and social science with empirically-tested results to discover how humans actually make choices. (Source: OECD Behavioural Insights page).

Through a combination of psychology, economic and more recently other behavioural research, behaviour insights examine how people are often neither deliberate nor rational in their decisions in the way that traditional economic models and associated strategies and policies assume. Behavioural insights build upon concepts and findings from the behavioural sciences and applies these to better understand how people behave and make decisions to improve the approaches of business, non-profit, and public sector organizations. (Source: OSC Investor Office Behavioural Insights report)

Behavioural economics - applies behavioural insights to markets and their constituent parts (individuals, firms et al). (Source: OSC Investor Office Behavioural Insights report)

Behavioural finance - applies behavioural insights to financial markets and offers potential advantages for consideration to regulators such as the OSC. (Source: OSC Investor Office Behavioural Insights report)

Default bias - also known as "status quo bias"; evident when people prefer things to stay the same by doing nothing or by sticking with a decision made previously. (Source: behavioraleconomics.com)

Disposition effect - a tendency to label investments as winners or losers. Disposition effect bias can lead an investor to hang onto an investment that no longer has any upside or sell a winning investment too early to make up for previous losses. This is harmful because it can increase capital gains taxes and can reduce returns even before taxes. (Source: Investopedia)

Endowment effect - describes a circumstance in which an individual values something that they already own more than something they do not yet own. Sometimes referred to as "diverstiture aversion", the perceived greater value occurs merely because the individual possesses the object in question. Investors, therefore, tend to stick with certain assets because of familiarity and comfort, even if they are inappropriate or become unprofitable. The endowment effect is an example of an emotional bias. See Lerner, Small, and Loewenstein's "Heart Strings and Purse Strings" on the Noted Papers page. (Source: Investopedia)

Nudges - liberty-preserving approaches that steer people in particular directions, but also allow them to go their own way. The goal of many nudges is to make life simpler, safer, or easier for people to navigate. Many nudges are intended to ensure that people do not struggle when they seek to interact with government or to achieve their goals. See also: choice architecture (Source: Nudging: A Very Short Guide)