Trading Psychology For Dummies

Chapter 13

Dealing with the Stock Exchange's Collective Misbehavior

IN THIS CHAPTER

Seeing how herd mentality plays out on the stock exchange

Assessing contagion risks

Managing information overload

In this chapter, I offer you a look at mass psychological phenomena and, more specifically, the (well-documented) herd behavior of market participants — behavior that gets reflected in a variety of ways. One particular benefit of reading this chapter is that you'll learn to recognize, early on, the contagion risks stemming from market sentiment and information overload and then exploit them for your own benefit.

Living the Stone Age Life

One clear result of a trader's reliance on selective perception is that they are influenced by mass sentiment in trading situations. They suppress the results of their own market analysis and prefer to rely on those of others. They are deathly afraid that their assessments may be wrong, and they also assume that others have more (and better) information. If they follow the opinion of the majority and invest accordingly, they may then try to justify this decision by dredging up information designed to confirm their actions. They refuse to acknowledge ...