Behavioral Finance Glossary: Key Terms & Concepts

This behavioral finance glossary is a helpful preparation guide to CFI’s behavioral finance course.

Anchoring bias

Relying on the first piece of information that’s encountered as a reference point (or anchor).

Confirmation bias

Our natural tendency is to listen to people who agree with us.  It feels good to hear our own opinions reflected back to us.

CRT test

Cognitive reflection task test

Framing bias

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.

Herding bias

We are hard-wired to herd. Going against the crowd / non-conformity triggers fear in people.

Hindsight bias

Prevents us from recognizing our mistakes. We tend to believe that after something happened, we knew about it all along.

Illusion of control

More information leads people to believe they can influence the outcome of uncontrollable events.

Illusion of knowledge

The tendency to believe that the accuracy of our forecasts increases with more information.

Loss aversion

Investors hate losses between 2 and 2.5 times as much as they enjoy equivalent gains.

Narrative fallacy

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.

Reflective reasoning

The logical approach to decision-making.

Reflexive reasoning

The emotional approach to decision making that is automatic, effortless, and the default option.

Representative bias

The judgment of events by how they appear, rather than by how likely they are.

Self-attribution bias

The tendency to attribute good outcomes to skill and bad outcomes to sheer luck.

Additional behavioral finance resources

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:

• Overview of financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model.
• Private company valuationPrivate Company Valuation3 techniques for Private Company Valuation - learn how to value a business even if it's private and with limited information. This guide provides examples including comparable company analysis, discounted cash flow analysis, and the first Chicago method. Learn how professionals value a business
• P&L templateProfit and Loss Statement (P&L)A profit and loss statement (P&L), or income statement or statement of operations, is a financial report that provides a summary of a
• List of financial certificationsTop Finance CertificationsList of the top finance certifications. Get an overview of the best financial certifications for professionals around the world working in the finance industry