Robin Hood Effect

A phenomenon where the less well-off gain at the expense of the better-off
The Robin Hood effect gets its name from the folkloric outlaw Robin Hood, who,
according to legend, stole from the rich to give to the poor.
A reverse Robin Hood effect occurs when the better-off gain at the expense of the less
well-off.
The term "Robin Hood effect" is most commonly used in discussions of income
inequality and educational inequality.
For example, a government that collects higher taxes from the rich and lower or no
taxes from the poor, and then uses that tax revenue to provide services for the poor,
creates a Robin Hood effect.
A Robin Hood effect can be caused by a large number of different policies or economic
decisions, not all of which are specifically aimed at reducing inequality.

Simon Kuznets argued that one major factor behind levels of economic inequality is the
stage of economic development of a country.
The theory prescribes that countries with very low levels of development will have
relatively equal distributions of wealth.
As a country develops, it necessarily acquires more capital, and the owners of this
capital will then have more wealth and income, which introduces inequality.
However, eventually various possible redistribution mechanisms such as trickle down
effects and social welfare programs will lead to a Robin Hood effect, with wealth
redistributed to the poor.

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 Therefore, more developed countries move back to lower levels of inequality.
Progressive Income Tax System
Many countries have progressive taxation. This has the effect of the better-off
population paying a higher proportion of their salary in tax, effectively subsidizing the
less-well off, leading to a Robin Hood effect.
Specifically, a progressive tax is a tax by which the tax rate increases as the taxable
base amount increases.
"Progressive" describes a distribution effect on income or expenditure, referring to the
way the rate progresses from low to high.
Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-
pay, as they shift the incidence increasingly to those with a higher ability-to-pay.

Frame Dependence
The human tendency to view a scenario differently depending on how it is presented.
Frame dependence is based on emotion, not logic, and can explain why people
sometimes make irrational choices.
For example, when presented with a scenario in which a sweater is being offered at its
full price of $50 and a scenario in which the same sweater is regularly priced at $75 but
on sale for $50, many consumers would perceive the latter as a better value even
though in both situations they are being asked to pay the same price for the same
sweater. Thus a real- life application of frame dependence is the use of strategic pricing
by retail stores to influence consumers' purchasing behavior.

Risk Parity
A portfolio allocation strategy based on targeting risk levels across the various
components of an investment portfolio.
The risk parity approach to asset allocation allows investors to target specific levels of
risk and to divide that risk equally across the entire investment portfolio in order to
achieve optimal portfolio diversification for each individual investor.

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 Risk parity strategies are in contrast to traditional allocation methods that are based on
holding a certain percentage of investment classes, such as 60% stocks and 40%
bonds, within one's investment portfolio.
A traditional 60/40 portfolio can attribute 80 to 90% of its risk allocation to equities.
As a result, the portfolio's returns will be dependent upon the returns of the equity
markets.
Proponents of the risk parity strategy state that while the 60/40 approach performs well
during bull markets and periods of economic growth, it tends to fail during bear markets
and economic slumps. The risk parity approach attempts to balance the portfolio to
perform well under a variety of economic and market conditions.

Plutocracy
A government controlled exclusively by the wealthy either directly or indirectly.
A plutocracy allows, either openly or by circumstance, only the wealthy to rule.
This can then result in policies exclusively designed to assist the wealthy, which is
reflected in its name (comes from the Greek words "ploutos" or wealthy, and "kratos" -
power, ruling).
A plutocracy doesn't have to be a purposeful, overt format for government.
Instead, it can be created through the allowance of access to certain programs and
educational resources only to the wealthy and making it so that the wealthy hold more
sway.
The concern of inadvertently creating a plutocracy is that the regulatory focus will be
narrow and concentrated on the goals of the wealthy, creating even more income and
asset-based inequality.

Dead Cat Bounce

A temporary recovery from a prolonged decline or bear market, followed by the
continuation of the downtrend.

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 A dead cat bounce is a small, short-lived recovery in the price of a declining security,
such as a stock.
Frequently, downtrends are interrupted by brief periods of recovery - or small rallies -
where prices temporarily rise. This can be a result of traders or investors buying on the
assumption that the security has reached a bottom.
There's an old saying in investing: even a dead cat will bounce if it is dropped from high
enough.
The dead cat bounce refers to a short-term recovery in a declining trend.

What Is a Dead Cat Bounce?

Let's take a look at a period of economic turmoil:

As you can see, the markets took a serious beating during this six-week period in 2000. As gut
- wrenching as this was, it was not a unique occurrence in financial history. Optimistic periods
in the market have always been preceded and followed by pessimistic or bear market
conditions, hence the cyclical nature of the economy.

However, a phenomenon unique to certain bear markets, including the one described above, is
the occurrence of a dead cat bounce. After declining for six weeks in a row, the market showed
a strong rally. The Nasdaq in particular posted gains of 7.78% after a disappointing string of
losses. However, these gains were short-lived and the major indexes continued their
downward march. This chart illustrates just where the cat bounced, how high it bounced and
then how far it continued to fall.

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What Causes A Cat To Bounce?
There comes a time in every bear market when even the most ardent bears rethink their
positions. When a market finishes down for six weeks in a row, value investors may start to
believe the bottom has been reached, so they nibble on the long side. Several factors
contribute to an awakening of buying pressure, if only for a brief time, which sends the market
up.

Reversal
A change in the direction of a price trend
On a price chart, reversals undergo a recognizable change in the price structure.
An uptrend, which is a series of higher highs and higher lows, reverses into a downtrend
by changing to a series of lower highs and lower lows.
A downtrend, which is a series of lower highs and lower lows, reverses into an uptrend by
changing to a series of higher highs and higher lows.
Also referred to as a "trend reversal", "rally" or "correction"

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Dead Cat or Market Reversal?
As we noted earlier, after a long sustained decline, the market can either undergo a bounce,
which is short-lived, or enter a new phase in its cycle, in which case the general direction of the
market undergoes a sustained reversal as a result of changes in market perceptions.

How can investors determine whether a current upward movement is a dead cat bounce or a
market reversal? If we could answer this correctly all the time, we'd be able to make a lot of
money. The fact is that there is no simple answer to spotting a market bottom. It is crucial to
understand that a dead cat bounce can affect investors in very different ways, depending on
their investment style.

Style and Bouncing

A dead cat bounce is not necessarily a bad thing; it really depends on your perspective. For
example, you won't hear any complaints from day traders, who look at the market from minute
to minute and love volatility. Given their investment style, a dead cat bounce can be a great
money-making opportunity for these traders. But this style of trading takes a great deal of
dedication, skill in reacting to short-term movements and risk tolerance.
At the other end of the spectrum, long-term investors may become sick to their stomachs when
they bear more losses just after they thought the worst was finally over. If you are a long-term,
buy-and-hold investor, following these two principles should provide some solace:

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  A well-diversified portfolio can offer some protection against the severity of losses in any
one asset class. For example, if you allocate some of your portfolio to bonds, you are
ensuring that a portion of your invested assets are working independently from the
movements of the stock market. This means your entire portfolio's worth won't fluctuate
wildly like a torturous yo-yo with short-term ups and downs.
 A long-term time horizon should calm the fears of those invested in stocks, making the
short-term bouncing cats less of a factor. Even if you see your stock portfolio lose 30%
in one year, you can be comforted by the fact that over the entire 20th century the stock
market has yielded a yearly average between 8-9%.

Falling Knife
A slang phrase for a security or industry in which the current price or value has dropped
significantly in a short period of time. A falling knife security can rebound, or it can lose
all of its value, such as in the case of company bankruptcy where equity shares become
worthless.
A falling knife situation can occur because of actual business results (such as a big drop
in net earnings) or because of increasingly negative investor sentiment.

Panic Selling
Wide-scale selling of an investment, causing a sharp decline in price. In most instances
of panic selling, investors just want to get out of the investment, with little regard for the
price at which they sell.
The main problem with panic selling is that investors are selling in reaction to pure
emotion and fear, rather than evaluating fundamentals. Almost every market crash is a
result of panic selling. Most major stock exchanges use trading curbs and halts to limit
panic selling, to allow people to digest any information on why the selling is occurring,
and to restore some degree of normalcy to the market.

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Bloodletting
A period marked by severe investing losses. Bloodletting may occur during a bear
market, in which the value of securities in many sectors may decline rapidly and heavily.
Investors facing a bear market have the option of riding out the downturn and holding
onto their investments, or selling their investments in order to mitigate losses. A sell off
of a particular security may result in a further decline in its value, as there are more
sellers than buyers available in the market. An investor, who thinks that the market will
improve, may take advantage of this situation by buying up bargain stocks.

Casino Finance
A slang term for an investment strategy that is considered extremely risky.
Casino finance refers to casinos and gambling, where players may have little to no
control over the outcome of their bets.
The terms often refers to large "bets" on investments that are typically high risk, with an
anticipated high potential reward outcome. However, as with betting at a casino, the
investor could "lose it all".
Casino finance generally refers to high dollar bets in the markets, either involving high
risk investments, and/or high leveraged accounts. Investors who employ these tactics
are usually taking large risks in order to attempt to earn large rewards.
While most investors prefer a more conservative approach, some investors are
comfortable undertaking a large amount of risk, in order to have the opportunity to
secure large returns.

Bagel Land
A slang term that represents a stock or other security that is approaching $0 in price.
Arriving in bagel land is usually the result of one or more major business problems that
may not be resolvable.
If a stock or other asset is headed toward bagel land or is approaching $0 (resembling
the hole in the middle of a bagel), investors generally feel that the security is
nearly

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 worthless. In such cases, a company may be nearing bankruptcy or facing major
solvency issues. While returning from bagel land is possible, the likelihood that equity
investors will lose their entire stakes in the company becomes very high.

Air Pocket Stock

A stock that experiences a sudden drop, similar to a plane hitting an air pocket. Air
pocket stocks are usually the result of investors reacting to negative news.
This is almost always caused by shareholders selling because of unexpected bad news.

Flight to Quality
The action of investors moving their capital away from riskier investments to the safest
possible investment vehicles. This flight is usually caused by uncertainty in the financial
or international markets.
However, at other times, this move may be an instance of investors cutting back on the
more volatile investments for the conservative ones (i.e. diversifying) without much
consideration of the international markets.
For example, during a bear market investors will often move their money out of equities
and into government securities and money market funds.
Another example is investors moving investments from high-risk countries with political
unrest and volatile economic conditions to less risky markets of other countries.
One indication of a flight to quality is a dramatic fall of the yield on government
securities, which is a result of the increased demand for them.

Dash to Trash
When investors flock to a class of securities or other assets, bidding up prices to
beyond what can be justified by valuation or other fundamental measures.
While the dash-to-trash effect can occur within any type of security, the phrase is
typically used to describe low-quality stocks and high-yield bonds, both of which can be
subject to periods of overbuying in the markets.

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 As the name graphically implies, investors are buying low-quality assets or assets that do
not correctly price in the risks associated with them.
The dash to trash often occurs near the end of a prolonged bull market, when investors
begin to seek higher returns regardless of the risks involved.
The longer it has been since a market downturn, the more likely it becomes that large
pockets of investors will feel bulletproof.

Ultimogeniture
A system of inheritance whereby the youngest son gains possession of his deceased
father's estate
Ultimogeniture was popular in many rural areas of medieval England, as well as parts of
France, but it is rare today. Much more common is/was the tradition of primogeniture, or
inheritance by the firstborn son.
Ultimogeniture, primogeniture and other forms of progressive inheritance have long
since given way to wills and other forms of correspondence that explicitly state the
desires of the decedent.
In days of old, however, one's inheritance rights were often tied to one's position of birth
(as well as one's gender).
Ultimogeniture is also known as postremogeniture, or junior right.

Laughing Heir
A distant relative who has inheritance rights despite not having a close, personal
relationship with the decedent
In most jurisdictions, the law requires that the property of a person who passed away
without leaving a will be given first to members of the decedent's immediate family, such
as a spouse, children, etc.
Under common law, this familial hierarchy extends as far back as it can be traced,
giving folks who may have never even heard of the decedent - much less known
him/her - inheritance rights.

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Many states have enacted laughing heir statutes that limit the rights of distant family
members of decedents who died without a will.
In these states, the decedent's estate passes, or escheats, to the state itself, to be
disbursed as government officials see fit.
In states without laughing heir statutes, distant relatives still have priority over the state
to an intestate decedent's belongings.
Therefore, it is important to know whether the state of your residence has any laughing
heir statutes when considering the execution of your will, lest you inadvertently leave
your benefactors liable to potential lawsuits from distant relatives.

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