| acceptance | Group discussion tends to induce group members to accept a decision too readily.
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| accuracy | Groups outperform individuals when it comes to intellectual tasks, but do worse than individuals when it comes to judgmental tasks.
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| affect | Emotional feeling.
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| affect heuristic | Basing decisions primarily on intuition, instinct, and gut feeling.
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| anchoring and adjustment | People form an estimate by beginning with an initial number and adjusting to reflect new information or circumstances. However, they tend to make insufficient adjustments relative to that number, thereby leading to anchoring bias.
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| anomalies | Empirical phenomena that appear to be puzzles with respect to the efficient market hypothesis.
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| availability bias | People overweight information that is readily available and intuitive relative to information that is less salient and more abstract.
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| aversion to a sure loss | People choose to accept an actuarially unfair risk in an attempt to avoid a sure loss.
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| base rate information | Information pertaining to the general environment.
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| behavioral APV | The inclusion of behavioral elements in adjusted present value to reflect either mispricing or managerial biases.
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| behavioral life cycle hypothesis | Over the course of their lives, people use mental accounts to cope with potential self-control problems that cause inadequate savings.
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| bias | A predisposition toward error.
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| casino effect | Preference for the small probability of a large payoff.
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| catering | Choosing a dividend policy with the purpose of responding to investors’ psychological needs, be those needs associated with preferences or with investor sentiment.
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| confirmation bias | People attach too much importance to information that supports their views relative to information that runs counter to their views.
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| conjunction fallacy | Miscalculating the probability of an event that is defined as the conjunction or simultaneous occurrence of a series of separate events.
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| debias | Reduce susceptibility to biases and framing effects.
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| desirability | One of the factors contributing to excessive optimism, commonly understood to be wishful thinking.
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| dilution cost | The value that acquirers believe that the target’s shareholders receive because the acquiring firm’s stock is undervalued in the market.
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| endowment effect | People attach a greater value to an object once they regard it as part of their endowment than before it becomes part of their endowment.
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| escalation of commitment | The tendency to throw good money after bad.
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| excessive optimism | People overestimate how frequently they will experience favorable outcomes and underestimate how frequently they will experience unfavorable outcomes.
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| extrapolation bias or hot-hand fallacy | Unwarranted extrapolation of past trends in forming forecasts.
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| familiarity | Essentially a form of availability bias, where available information is familiar information.
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| frame | Synonymous for description.
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| framing effect | A person’s decision is influenced by the manner in which the setting for the decision is described.
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| gamblers’ fallacy | The tendency to overweight the probability of an event because it has not recently occurred at a frequency that reflects its probability.
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| groupthink | The drive for achieving group consensus overrides the realistic appraisal of alternative courses of action.
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| hedonic editing | People prefer to experience gains separately rather than together, but integrate small losses into larger gains.
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| heuristic | A rule of thumb used to make judgment or a decision.
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| hindsight bias | The tendency to view events as obvious or almost certain in hindsight when they are neither obvious nor almost certain when viewed in foresight.
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| hot issue market | Demand for new issues is relatively high.
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| hubris hypothesis | Firms experience the winner’s curse in mergers and acquisitions because of hubris.
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| illusion of control | People overestimate the extent to which they can control events.
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| illusion of effectiveness | Unwarranted confidence in the decision.
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| incentive compatibility constraint | The principal chooses the carrot-and-stick differential in terms of pay for performance so as to induce the agent to represent the interests of the principal.
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| initial underpricing | The offer price is too low, resulting in a large first-day price pop.
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| inside view | Taking a perspective on a project by focusing on the details specific to that particular project.
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| limits of arbitrage | Smart investors do not fully exploit mispricing because of the attendant risks that the mispricing will become larger before it becomes smaller.
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| longholders | Excessively optimistic, overconfident CEOs who hold their options into the final year.
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| long-term underperformance | New issues earn lower returns than stocks with comparable characteristics against which they have been matched.
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| loss aversion | Psychologically, people experience a loss more acutely than a gain of the same magnitude.
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| mental accounting | Mentally separating information into manageable pieces, by maintaining separate accounts.
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| momentum | Recent losers tend subsequently to underperform the market, and recent winners tend subsequently to outperform the market.
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| narrow framing | Treating a repeated risk as if it were a one-shot deal.
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| nonoverpayment constraint | The principal does not over-pay the agent.
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| 1/n heuristic | A simple rule of thumb that assigns equal weight to all choices under consideration.
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| opaque framing | Describing a decision task in a manner that renders the consequences of the decision difficult to discern.
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| outside view | Taking a perspective on a project by comparing the characteristics of a specific project with a large population of projects which are similar in nature.
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| overconfidence | People make mistakes more frequently than they believe and view themselves as better than average.
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| overreaction | The percentage change in market price in response to an event is too large.
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| overweighting of small probabilities | People tend to over-weight low probabilities attached to extreme events.
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| participation constraint | The principal offers attractive enough terms to the agent to induce the agent to participate.
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| P/E heuristic | An approach to valuation based on multiplying a P/E ratio and an earnings forecast.
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| PEG heuristic | An approach to valuation based on multiplying a PEG ratio, an earnings forecast, and a forecast of the growth rate.
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| polarization | Group processes tend to accentuate attitudes toward risk.
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| poor information sharing | Group members fail to share enough information with other group members.
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| post-earnings-announcement drift | The stocks of firms that announce positive earnings surprises experience positive drift after the announcement, while the stocks of firms that announce negative earnings surprises experience negative drift after the announcement.
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| preference reversal | Choosing low-value alternatives over high-value alternatives.
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| press coverage overconfidence indicator | The press uses the words optimistic and confident to describe an executive.
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| price-to-sales heuristic | An approach to valuation based on multiplying a price-to-sales ratio and a sales forecast.
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| prospect theory | A general psychological approach that describes the way people make choices among risky alternatives.
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| reference point | Benchmark used to measure gains and losses.
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| regret | An emotion that occurs when people imagine having taken a different decision than the one they actually took, one that would have turned out favorably rather than unfavorably.
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| representativeness | People make judgments based on stereotypic thinking, asking how representative an object or idea is to the class to which it belongs.
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| self-attribution error | The tendency for people to take credit for positive outcomes and to blame others or bad luck for negative outcomes.
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| self-control | The act of exercising control over one’s impulses, usually to delay gratification.
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| sensitivity of investment to cash flow | Investment depends on how much cash a firm holds.
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| sentiment | Aggregate investor error, either excessive optimism or excessive pessimism.
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| singular information | Unique information directly related to a situation or object.
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| social loafing | Group members reduce their contributions, instead relying on others to exert the requisite effort.
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| sunk cost | An expenditure made in the past that is irrevocable.
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| transparent framing | Describing a decision task in a manner that renders the consequences of the decision easy to discern.
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| underreaction | The percentage change in market price in response to an event is too small.
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| visibility | How noticeable a project or activity is to others.
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| willingness to pay | How much a person or group is willing to pay to acquire something.
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| winner’s curse | The winning bid in an auction results in the winner overpaying.
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| winner–loser effect | Extreme past losers tend subsequently to outperform the market, and extreme past winners tend subsequently to underperform the market.
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