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Far From Random: Using Investor Behavior and Trend Analysis to Forecast Market Movement by Richard Lehman

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Chapter 6. New Thinking in Finance Isn't Financial

The market represents everything everybody knows, hopes, believes, anticipates, with all the knowledge sifted down to what Senator Dolliver once called . . . the bloodless verdict of the marketplace.[31]

William Peter Hamilton, editor of the Wall Street Journal, 1922

The prevailing financial wisdom considers human factors to represent the static in the otherwise clear-sounding hum of an efficient, financially driven marketplace. It further holds that human factors are temporary, unpredictable, and self-canceling. Yet throughout the annals of stock market history, even the most revered financial luminaries have been uttering quotes like the one opening this chapter, acknowledging the impact of social mood and behavior on stock prices. Over the last thirty years in particular, a substantial body of work, including hundreds of academic papers and numerous books, has identified and substantiated numerous human psychological factors that affect financial decision making, and this body has concluded that these human factors are persistent, systematic rather than self-canceling, and potentially substantial. Yet almost nothing has changed in the way investments are managed in this country. Why is it that we are all in such denial over these important phenomena?

Part of the reason for this may be that, despite all the research on human behavior, few if any methods have been suggested for integrating this knowledge into investment management. ...

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