Greetings qpet-
This was an interesting set of terms to define. I've tried to supply
brief "plain language" definitions along with more technical ones and
some links to pages with longer explanations.
LOSS AVERSION
In behavioral economics, the concept of loss aversion (first
introduced by recent Nobel prize winner Daniel Kahneman and Amos
Tversky in 1979) refers to the tendency of investors to weigh losses
more heavily than gains. Loss aversion is the idea that people weight
an actual loss more heavily than the equivalent absence of a
potential gain
"Loss aversion" is widespread pattern, evident in many aspects of
decision making, in which people seem particularly sensitive to losses
and eager to avoid them. In many cases, this manifests itself as an
increased willingness to take risks in hopes of reducing the loss.
http://www.wwnorton.com/gleitman/glossary/L.htm
It's loss aversion that will cause a gambler to "throw good money
after bad" or to be more unhappy about losing $100 than he is happy
about winning $100.
The notion that individuals assign more importance to losses than they
assign to gains. Loss aversion implies that investors are less
inclined to sell assets at a loss than they are to sell assets that
have gained in value - even if expected returns are the same.
http://risk.ifci.ch/00011991.htm
Loss aversion: A disinclination to accept a small loss of any good
without large compensation in terms of other goods. A tendency to take
losses more seriously than gains of equal size
http://216.239.51.100/search?q=cache:KL2Qm8XOeBMC:www.uri.edu/artsci/ecn/burkett/201glos.pdf+%22loss+aversion%22+glossary&hl=en&lr=lang_en&ie=UTF-8
Risk aversion or loss aversion?
"Economists used to think people were risk adverse, but they couldn't
figure out why people behaved in a manner so grossly in violation of
the principles of probability. Then psychologists figured out that it
isn't risk that people are adverse to, it is loss.A common example is
one where you are a general in charge of a military operation. Your
troops are cut off, you know that there are only two ways out, one
would lead to a loss of 50% of your force and the other could allow
you to escape without casualty if undiscovered, but if found by enemy
scouts your troops will be murdered, taking a 75% loss. It is
estimated that you have a 70% of being discovered while making your
escape.
"When faced with a guaranteed loss, or the slim chance of not having
to take a loss most people gamble on the riskier second option. The
mathematical expectation of these two options is different, in the
first you have a 100% chance of taking a 50% loss, so the expected
loss is 50%. The second option has a 30% chance of no losses and a 70%
chance of a 75% loss, the expected loss is therefore 53%. Expectation
says the first option is the better one, but most people would take a
gamble on the second option so as to possibly not have to take losses
at all.
"The phenomenon when applied to investment and gambling is what makes
people play in a riskier and riskier manner after taking a loss. The
intense desire to walk away without taking a loss prompts them to
gamble in a reckless manner in the hope of making their money back.
Traders are guilty of this too, especially those that use Martingale
methods of 'money management.'
"Loss aversion is a powerful barrier. Because of the reckless
behaviour that people exhibit when trying not to take a loss they
usually end up losing more money than they would have if they just cut
and ran. Every big loss was a small loss once that somebody refused to
take. They hang on relentlessly while something just goes right down
the tubes, all the while holding out some slim hope that fortunes will
be restored. This is not the expected behaviour of a risk adverse
organism."
http://www.travismorien.com/FAQ/riskorloss.htm
VOLUNTARY SIMPLICITY
Based partly on Mother Elizabeth Anne Seton’s admonition to "Live
simply so that others may simply live" "Voluntary Simplicity" was
popularized by Duane Elgin, author of the book Voluntary Simplicity:
Toward a Way of Life That Is Outwardly Simple, Inwardly Rich. Duane
Elgin, (William Morrow and Co., Inc., 1981).
Elgin's website
http://www.soulfulliving.com/voluntarysimplicity.htm
It refers to adopting a simpler life-style by reducing our consumption
in order to help conserve the earth's dwindling resources. Many feel
that the simple life is less stressful and more fulfilling -- it's a
way to reduce the number of hours spent working for pay and increase
the time spent with children, friends, family or contribuing to the
community.
http://www.poppyware.com/pna/volsim.html
voluntary simplicity n. movement to simplify lifestyles and devote
more time and energy to non-material aspects of life. Strong in
Seattle& The Netherlands. Practitioners are sometimes called
downshifters
http://www.iisd.org/didigest/glossary.htm#V
The trend to reduce consumption and return to old-time virtues of
frugality and thrift has swept across the nation, from big cities to
rural areas. Myriad books, newsletters, study groups, and seminars
have fueled interest in this phenomenon, known variously as "voluntary
simplicity," "simple living," or "downscaling."
http://www.quicken.com/cms/viewers/article/retirement/14765
REVERSION TO THE MEAN
Reversion to the mean is the statistical phenomenon stating that the
greater the deviation of a random variate from its mean, the greater
the probability that the next measured variate will deviate less far.
In other words, an extreme event is likely to be followed by a less
extreme event.
http://mathworld.wolfram.com/ReversiontotheMean.html
In investing, reversion to the mean is the tendency over time of
investment returns to move toward a norm, or mean.
John C. Bogle's (Vanguard) analysis of the history of investment
returns reveals that over long periods such as the 20, 30, or even 40
years during which people invest for retirement, "it is an odds-on bet
that a fund's gross rate of return will approximate that of the stock
market." The usual measure of this "mean" is a market index. "Most
investors are completely unaware that today's top performers are
overwhelmingly likely to be tomorrow's ordinary participants in the
stock market."
http://victory.vanguard.com/vbs/lit/newsstnd/spring1998/invlawgr.html
Reversion to the mean is a principle you can observe in nature — with
your children, in fact. For example, tall people tend to marry tall
people, while short people tend to marry short people. (I know, it's a
gross simplification, but bear with me). One would think that this
would lead to increasingly taller and shorter people, with fewer in
the middle. But that's not the case. Most people revert to the mean,
at least in terms of height.
http://www.usatoday.com/money/perfi/columnist/netgains/2002-10-09-stock-market-mean_x.htm
THEORY OF DIMINISHING RETURNS
Classical learning curves predict price declines (or an increase in
quality) as the volume of produced goods doubles. This is the
so-called theory of diminishing returns.
http://www.friction-free-economy.com/archives/18-10.html
An increase in use or application of units of any one product results
in "diminishing returns" per unit being realised. Every spoon of sugar
you add to your cup of coffee brings a lesser degree of "sweetness"
per spoon. Note, it is not the total aggregate of "sweetening
capacity" that is lessened but the returns you get per spoon.
Likewise, the overproduction of any item realises quantities of supply
greater than the required demand and the result is a drop in value of
the item, in other words, the exchange-value of the item or product,
its selling strength in the market place, is compromised.
"The theory of diminishing returns, which holds that products or firms
will eventually be limited by rising costs or diminishing profits, is
a tenet of the traditional, bulk-production industries. As the economy
has evolved from bulk production to high technology, however,
diminishing returns have given way to increasing returns, which are
based on positive feedbacks. With increasing returns, a product or
company that gains a sizable advantage can continue to exploit that
advantage-and get a lock on its specific market."
http://www.cbi.cgey.com/journal/issue2/features/convers/abstract.html
BELL CURVE
"Bell curve" is another name for a "standard" or "normal"
distribution, which has a bell-like shape-- low at both ends and high
in the middle-- when graphed.
Normal Distribution
Also called a "bell curve." This is what we expect to find when we
measure a large group of people. Basically, most people will be
centered around the mean, and fewer people will be represented farther
away from the mean. A graph of this information will resemble a bell
shape. How tall and wide the bell is shaped is an indication of the
variance.
http://www.ncspearson.com/research-notes/glossary.htm
"The concept of a normal curve is important in understanding the use
of statistics. Most direct measures used in the study, for instance,
of varying traits in human beings and most psychological measures,
such as IQ scores, have been found to approximate closely a
mathematical model called the normal distribution.
"The graph of this normal distribution is a continuous, symmetrical,
bell-shaped curve. Frequencies tend to concentrate around the median
and become fewer and fewer at either end, resulting in a frequency
curve which is high in the middle and low at the ends.
"The normal curve is a limited curve which is approached by many
distributions when a large number of measurements is made or, as is
often said, when there is a large number of cases. It is necessary to
assume that these measurements or cases are taken at random, or that
there is no bias or systematic error."
http://radicalacademy.com/statistics4.htm
Search strategies: 1)"loss aversion"; "loss aversion" glossary
2)"voluntary simplicity"; "voluntary simplicity" glossary"; simplicity
Seton; "voluntary simplicity" "Duane Elgin"
3)"reversion to the mean"
4)"theory of deminishing returns"
5) "bell curve"; "bell curve" glossary
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Nellie Bly
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