Herd Behavior
October 30, 2008 – 6:32 pm by BHIn theory, the stock market works rationally and investors always exercise a disciplined calculus to part with their hard-won cash.
But in reality, as the previous two days have shown so dramatically, there is a lot of raw emotion and frail psychology in the “demand” half of the crowning equation of “supply and demand.”
The coupling of Monday’s 554-point drop and Tuesday’s 337-point rise in the Dow Jones industrial average “is an extreme example of the fact that Wall Street decision-making is based on emotional, not rational, analysis,” said Maurice Elvekrog, a psychologist and financial analyst in Bloomfield Hills, Mich.
He attributed the wild trading to “herd behavior” largely on the part of fund managers, who on Monday reacted en masse to a crisis in Far East markets by selling and then on Tuesday lapped up the now-discounted spoils. “Presumably the professional managers are doing their own thinking and analysis,” he said. “But they all tend to live in the same world and are very concerned about quarterly results. They don’t want to be left behind.”
From the LA Times (LAT). Oh, by the way, that’s from the LA Times way back in 1997. Ah, progress.
