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Behavioral Trading

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Behavioral Trading

Methods for Measuring Investor Confidence, Expectations, and Market Trends

Thomson Texere,

15 min read
10 take-aways
Text available

What's inside?

Human behavior drives the market, which has its own mind, mood and body. To trade profitably, analyze each component.

Editorial Rating

9

Qualities

  • Innovative
  • Applicable

Recommendation

Long time market commentator Woody Dorsey, the theorist behind market semiotics, sees Wall Street as a continuum of the agora or the medieval street fair: a place where people congregate and trade, motivated by their own psychological drives. But if investors are still behaving based on the same visceral emotions that drove exchanges of goats in ancient bazaars, what does that forecast about how the market will act today? According to Dorsey, quite a lot. Interspersed with anecdotes that range from biography to paleontology to horse training, he offers principles and techniques that explain marketplace behavior in a way investors can understand and utilize. Begin with how he scans newspapers, a methodology worth remembering, and continue through his explanation of the Triunity Theory, a new system for understanding behavioral finance. Agree or disagree with his contrarian thinking, getAbstract.com believes his interesting diversions and innovative economic thinking will sweep you along. Dorsey brings many subjects together, but the two most interesting are, of course, why people behave as they do and how it affects the market and your money.

Summary

Triunity Theory

Behavioral economics has been around almost as long as human behavior. Successful traders and investors have always known that there is more to trading and investing than the numbers indicate. However, a strain of rationalism hit the world in the eighteenth century and the contemporary science of economics evolved out of that tradition. Economists, therefore, assume as their starting point that people are rational economic actors seeking to do the things that best advance their self-interest. Thus, they carefully evaluate various possible outcomes and choose the one with the best economic result. The only problem with this way of thinking about people is that it runs directly contrary to much of human experience. People don’t behave rationally. There is nothing rational about greed, fear, lust and other powerful, proven motivations for human conduct. Think of market bubbles that send stock prices up far beyond any possible economic justification. Think of the nightly news. There’s plenty of evidence that people behave irrationally, but until the advent of the science of behavioral economics, economists tended to ignore this evidence.

The Greek philosopher...

About the Author

Woody Dorsey began publishing his market commentary in 1985. He lives in Vermont.

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