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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 8. Anomalies

Random walkers eat your heart out![56]

Yale Hirsch, Stock Trader's Almanac

anom·aly: A deviation from the norm or from a common rule; an incongruity, irregularity, or inconsistency.

Years ago, stock market anomalies may have been little more than interesting factoids to throw out at cocktail parties. But these days their existence takes on new meaning as evidence of the way human behavior manifests itself in market behavior.

To identify a stock market anomaly using the definition above, one must first determine what is "normal" or what "common rules" are applicable. If one believes that the behavior of stocks is described by a random walk, then one could justify an extremely wide variation in market behavior as being within normal bounds. Behavioral experts Daniel Kahneman and Amos Tversky describe market anomalies as follows: "Economics can be distinguished from other social sciences by the belief that most (all?) behavior can be explained by assuming that agents have stable, well-defined preferences and make rational choices consistent with those preferences. . . . An empirical result qualifies as an anomaly if it is difficult to 'rationalize,' or if implausible assumptions are necessary to explain it within the paradigm."[57] The paradigm is the efficient market.

Let's look at real situations rather than argue semantics. Most of us would view a three-legged frog as an anomaly but would we have the same regard for General Motors stock at $5 per share when it has ...

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