Market Psychology

Market psychology is the role of investor mood and expectation in setting prices. It is the explicit subject of The Mind of Wall Street, where mood is treated as the primary pricing mechanism, and the applied version of the premise in The Interpretation of Dreams that motives are largely hidden from the person holding them. It is the trading-desk counterpart of Behavioral Finance.

• Valuations catch up to companies. Nnamdi Iregbulem’s thread argues that “companies don’t catch up to their valuations; their valuations catch up to them.” It names three drivers of rising multiples (rising growth expectations, falling return expectations, and irrational exuberance), notes that subjective expectations eventually collide with objective reality, and concludes that multiples mean-revert (see Reversion to the Mean).
• A sentiment cycle. Josh Wolfe compresses a down market into FOMO, then SOBS (shame of being suckered), then POLL (pride of losing less): “Failure comes from failure to imagine failure.” See Venture Cycles.
• Humility. A saved note on stock picking warns that being up 65% in an up-market is not genius, nor is pointing out a stock down 65% in a down market.
• Books on the subject. The Trading Lessons of Mortimer Sagecroft sits in the same reading list.

Where this appears

• 1- How Investors Justify High… (tweet)
• 3 The shift went from… (tweet)
• You Weren’t a Genius When… (tweet)
• The Mind of Wall Street
• Reversion to the Mean