Chapter 29

Affinity fraud is the commission of fraud against people or entities with which the perpetrator of the fraud shares a common bond, such as race, ethnicity, or religious affiliation.

Anchoring may be viewed in this context as a tendency to rely too heavily on previous beliefs.

Behavioral biases are tendencies or patterns exhibited by humans that conflict with prescriptions based on rationality and empiricism.

Behavioral finance studies the potential impacts of cognitive, emotional, and social factors on financing decision-making.

A circuit breaker is a decision rule and procedure wherein exchange authorities invoke trading restrictions (even exchange closures) in an attempt to mute market fluctuations and to give market participants time to digest information and formulate their trading responses.

Confirmation bias is the tendency to disproportionately interpret results that confirm a previously held opinion as being true.

When large investors hold substantial positions in the same asset or similar assets, it is known as a crowded trade.

Fraud is intentional deception typically for the purpose of financial gain.

Placing transactions to record high or low prices on the transaction records of public markets is a fraudulent activity often termed painting the tape, in reference to the historical use of ticker tape to broadcast prices.

A Ponzi scheme is a fraudulent program that returns deposits to investors and identifies the returned capital as a distribution of profit in order to overstate the profitability of the enterprise and to attract additional and larger deposits.

Restitution is the restoration of lost funds.

Return on assets (ROA) is profit before financing costs (and taxes), expressed as a percentage of assets. ROE can be expressed as a function of ROA, leverage (L, which is defined here as the ratio of assets to equity), and interest costs on the financing (r): ROE = (ROA x L)-[r x(L-1)]

Return on equity (ROE) is profit after financing costs, expressed as a percentage of equity.

Spoofing is the placing of large orders to influence market prices with no intention of honoring the orders if executed.

The unwind hypothesis suggests that hedge fund losses began with the forced liquidation of one or more large equity market-neutral portfolios, primarily to raise cash or reduce leverage.

Window dressing is a term used in the investment industry to denote a variety of legal and illegal strategies to improve the outward appearance of an investment vehicle.