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

Introduction

“Experience teaches us no less clearly than reason, that men believe themselves free, simply because they are conscious of their actions, and unconscious of the causes whereby those actions are determined.”

—Baruch Spinoza, “Part III: On the Origin and Nature of the Emotions; Postulates (Proposition II, Note)” from R. H. M. Elwes, trans., The Ethics, 1955, p. 54 (original work published 1677)

In the wake of the dot-com crash and the collapse of the US housing bubble, it is clear that non-rational impulses, such as the mania at the height of these bubbles and the subsequent panics that followed in the downturns, play a major part in collective human investment behaviour. These irrational sentiments, which have the capacity to greatly influence asset prices and at times feed financial bubbles that threaten to trigger great social unrest, have been given many names. The founding father of fundamental analysis, Ben Graham, and later his most famous disciple, the investor Warren Buffett, named them the manic-depressive Mr. Market; the economist J. M. Keynes referred to animal spirits; and the former US Federal Reserve chairman Alan Greenspan talked about irrational exuberance.

The inability of conventional economics to account for human irrationality renders the commonly accepted economic and financial theories void. Economists adhering to these conformist thoughts are at a loss as to how to adapt their theories to account for collective human behaviour that does not ...