Page 462 - THE MARKET WHISPERER

458 PART 14 - The Demons Are Coming!

reign of psychology. Since the Israeli psychologist Dan Kahneman, 2002
Nobel Laureate for Economic Sciences, has taken the lead in the field of
economics, we can openly state that something is definitely going on!
Now, in contrast to the basic premises of “universal logic” and “market
efficiency,” we understand that the market is driven by flesh and blood
people, regular folk, with emotions, fears and wishes. And their behavior
can be anticipated. Since their psychological conduct can be anticipated,
correct analysis will help us anticipate market behavior. This is the road
to success.

In an efficient market where knowledge is accessible to all, the
phenomenon of price trends and basic laws of trading cannot exist. An
efficient market conducts itself randomly. In an efficient market, there
is no meaning to past, present, or future. In an efficient market, there
is no technical analysis, only economic analysis based on fundamental
principles.

Multiple studies clearly show that technical analysis, at least to some
degree, really works. One research study examined the effectiveness of the
technical formation of “head and shoulders.” It was found that the trading
volume on the day the formation broke out was greater by an average of
60% than on the previous day. Many traders make their living by buying
and selling stocks based on technical formations appearing on the charts.
Since an increasing number of traders rely primarily on these charts, even
if we are sworn believers in the efficiency and logic of markets, we cannot
just stand on the sidelines, thrust our heads into the sand, and ignore the
psychology of the masses.

Behavioral Models

Since we are dealing with flesh and blood humans, we need to check the
basic psychological models according to which these humans conduct
themselves. Let me name a few:
• Opportunity assessment: in many cases we tend to ignore information

we hold, and judge events only according to our assessment of our
ability to succeed or fail
• Conservatism: despite new information and events, we change our
views too slowly
• Distortion of truth: we tend to credit ourselves with successes, but
blame failures on events or external factors
• Excessive self-confidence: we tend to overestimate our abilities.
Understanding our shortcomings will help us comprehend why the