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Psychology of Trading Essay

In a general summary of human events and fortunes, diametrical oppositions create a kind of dialectic of change that works in cycles with not a lot of change happening for most companies but rather slow decline for many and quick change only to face a doomed fall for so many more. This is not really delved into, what partnership the opposing teams have for each other.

The professors who are “out of touch” and talking about fundamentals against the more clever or crafty investment professionals who know and have known for so long how irrational the market is and how crowd dynamics certainly play a huge role in raising or lowering certain stocks. While the authors seem to think that professors are genuinely out of touch and should teach to industry standards what is neglected are how much fundamentals should matter in the long-run.

However, I do agree that professors should certainly assess crowd psychology and not only that but the addictive mass-consumption aspect of investments. Stocks are products just like any other though they are symbolic products as well as liquid assets so it’s certainly prestigious to say that you own a lot of shares of Google, just like it used to be prestigious to own Bethlehem Steel but why not just say you have a lot of money to spend on electronic packets of value? Why do people boast about their portfolio and encourage friends to buy into the next great stock that they claim to be smitten by?

I think that social networks rather than classic crowd psychology treatise are more helpful in discovering the cascades of “irrational” investing and “rational” counter-investing that people engage in. Because stocks have contested and insecure meaning equilibrium is rare yet if the fundamentals are there or more broadly, if they offer a great product that people love to consume then truly it would be not so wise to follow what people do as you miss the best opportunity and settle for the second best.

Theoretically if a person could audit a company with a team of the best auditors they should be in possession of very valuable information if this company is trading heavily but can be expected to reach an equilibrium point where it rises for quite awhile and never falls too deeply. Kind of like Best Buy’s stock from July of 2005 to October of 2008, there it seemed like the company satisfied with fundamentals for a long time and created a crowd of loyal consumers who bought not for gain but stability.

Then too much bad news and the fundamentals started looking not so good, resulting in a huge dip in the price of the stock to approximately half of the equilibrium value it maintained during the time coordinates specified above. Prestige and the social conditioning forces are simplified in this article with a few less than well-chosen passages of Le Bon who wrote an awful lot about crowd psychology but was more of an inspiration than truly a fruition of great ideas that stand firm on their own.

How convincing both the fundamentals argument and the crowd-mechanisms are is really uncertain as even the authors seem to realize that both are important though crowds are far more discussed than issues like why “Fundamentals” are not always terribly predictive and why. A lot is stated in this article but it’s not really a great think-piece as you learn a lot of information but without a great theoretical framework it resembles a mismatch that barely works towards conciliation.


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