Reversals in Minds and Markets
Jon Markman and Brett Steenbarger
This is a draft of an article that appeared in July, 2002 on the MSN Money
Consider the following scenarios:
A highway patrol officer aims his radar gun at passing cars to determine who is
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
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.
good news,” the psychologist responds.
“You’re feeling so bad, you’ve got to be
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
As the consequences mount, so do their faulty efforts at coping, creating a