Reversals in Minds and Markets

Reversals in Minds and Markets - Reversals in Minds and...

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Reversals in Minds and Markets Jon Markman and Brett Steenbarger Note: This is a draft of an article that appeared in July, 2002 on the MSN Money ( www.moneycentral.com ) website. Consider the following scenarios: A highway patrol officer aims his radar gun at passing cars to determine who is speeding. He notices a vehicle traveling 45 miles per hour in a zone that only permits 30 mph. As it passes the patrolman, however, the car accelerates to 50, then 60, then 70 miles per hour. The officer lets out a sigh of relief, noting to his partner, “Well, we don’t have to worry. He’s going down the road so fast, he’ll have to slow down eventually!” A psychologist meets with a client who has been complaining of feelings of depression. For the past several weeks, she has not been eating well and her sleep has been disrupted. At this meeting, however, the client divulges that she now can barely get out of bed and is entertaining regular thoughts of suicide. “That’s good news,” the psychologist responds. “You’re feeling so bad, you’ve got to be improving shortly!” For the second time in a row, the stock market declines over 3% in a single session, with the number of issues making new 52 week lows swamping the number making annual highs. Volume and volatility have picked up on the decline and a well-known market analyst concludes, “We’re seeing a capitulation. This is a great time to buy.” In all three examples, people are making inferences about a reversal of trend based upon its increasing trajectory. Interestingly, where the first two situations seem absurd, the third has been a staple of recent market commentary. It has also been a major reason why investors have held onto positions through the recent decline, reluctant to sell when a bottom might be at hand. In this article, we would like to explore the psychology of reversals and shed some light on how change occurs in minds and markets. We believe that such an analysis will help investors frame their market strategies in the light of Wednesday’s dramatic reversal and the raised hopes it has fostered. Reversals and Emotional Change The idea of the positive feedback loop is common to many approaches to psychotherapy. Problems occur when people become locked into coping patterns that create negative consequences. As the consequences mount, so do their faulty efforts at coping, creating a downward spiral.
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A classic example is insomnia. Once a person finds that she cannot sleep, she begins to worry about sleeping and engage in a variety of actions to make herself sleep. Of course, it is difficult to feel naturally drowsy when one is trying with all one’s might to induce
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Reversals in Minds and Markets - Reversals in Minds and...

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