Q..........
Hi Tom,
I am in my final year at university and I am doing my dissertation on the psychological behaviour of people working in financial institutions (people dealing with money on a daily basis), e.g. working in the stock market or other money markets.
If you have any helpful information relating to this topic please could you e-mail me.
Thank you, TCU
A..........
Good morning TCU,
Thank you for stopping by the AIM web site for information on market and personal psychology. Yes, in the broad view, the stock market behaves much like a giant barometer measuring the mass attitude of the participants.
Today's very short term trading prevalent in the United States in recent years seems to magnify the peculiar behavior of the participants.Not only is the individual investor looking at very short term time horizons, many mutual funds also have very high "inventory" turn-over rates.
Risk and reward are joined as they always have been. As easy as this concept may be to understand, when we change the terms to fear and greed, the concept changes meaning. During the U.S. market's "crash" in 1987, I received a panic call from a former co-worker. He was about 6 months from retirement and had his entire pension value tied up in a good quality mutual fund. He was very profitable in that fund as the money had been there for some time. On the day of the "crash", he called to ask what he should do. Our market prices were down about 25% for the day at that point and off nearly 40% from their summer highs.
My suggestion was that he should sit tight and let the storm pass. This, he said, was unacceptable. He'd been willing in the mid summer rally to let the entire amount remain at risk (GREED) and now that he'd given back almost 40% of the fund's peak value, he wanted to sell out of it to prevent further "loss" (FEAR). In fact if he sold everything, he would not lose money as the market value even on that depressing day was still far above his cost.
I told him that if he couldn't stand just waiting out the market shock, that maybe he should sell half of his position. Thereby only being half wrong no matter what happened! Please remember that this was an adult, well educated (BS - Engineering) with a lifetime career designing capital equipment for one of the most cyclical of industries - Automobiles. You'd think that his experience would have already prepared him for boom/bust cyclicality.
I didn't see or hear from him again until the summer of 1988. I saw him out golfing with friends. He looked at me and said, "Don't even ask. I sold it all." Not only did he sell at the very worst time, he then stayed out of the market until the recovery was well under way, just before I saw him that summer.
As an interesting side note to this, he almost never spoke with me again. It seems as though my being right on this offended him so much that he was willing to let our previous years of acquaintanceship die rather than face up to his own mistake and guilt derived from it.
At my web site I suggest several books that relate to the stock market in different ways. Of the five listed, two are books on psychology. There is very good reason for this. David Dreman's book is a classic on the general theory of market psychology (written in 1977). Jesse O'Neil's book has more to do with how we treat the whole subject of money. Her discussion relates to people's disfunctional relationship with money, which she terms "Affluenza."
(web site affluenza.com ) She considers the disease to be an epidemic in the US and many other industrialized countries.
Brief reports are given at execpc.com . These books all relate to how I've worked to avoid mass market psychology and profit from it. My joking motto is "Buy from the Scared and Sell to the Greedy!" I try very hard to avoid "Herd Mentality" and remain contrarian. Having a business plan devised to be contrarian is what I attempt to teach through my web site.
I don't know if this will be of any direct help for you in preparing your dissertation, but maybe will relate to it in some fashion. Please feel free to ask further questions as they arise.
Best regards,
Tom Veale
execpc.com |
