The Mystery of Market Movements: An Archetypal Approach to Investment Forecasting and Modelling

Chapter 6Developing a Conceptual Measurement Methodology Based on Archetypal ForcesPart I: Building Blocks

Chapter 5 highlighted a number of standard theories—some nowadays considered defunct, others still in vogue—used to explain the psychological drivers behind price trends and, especially, the occurrence of bubbles in financial markets. The generic problem with all these methodologies is that they, at best, seem applicable only occasionally and no one has been able to explain and predict when they are more likely to work or why they work. The collective investor sentiments driving these market forces just seem too elusive to be captured by standard models. The perceived irrationality in making investment decisions appears difficult to time and the existing methodologies fail to provide a convincing rationale concerning the triggers and root causes. Typically these psychological triggers are often quickly glossed over as “stemming from the unconscious” or leisurely referred to as “animal spirits” with no further in-depth explanation.

Given the huge impact these fluctuations have on asset prices, and society at large, as financial bubbles over and over highlight, and the fact that fundamental valuation models do not factor them in at all, it is important to try to understand the nature of the underlying drivers. So, if an approach based on recurring price patterns, the trending of “emotion words,” or any other attempts to capture and predict investor sentiments do not seem ...