By Elliott Wave International's Robert Prechter, Prechter's Market Perspective
It's not necessary to visit a cattle ranch to find herding behavior. Consider this report from today's news: 'Two of America's allies in Iraq are withdrawing forces this month and a half-dozen others are debating possible pullouts or reductions, increasing pressure on Washington as calls mount to bring home U.S. troops.' (Associated Press, December 1, 2005)
Was it also herding behavior when the 'coalition of the willing' that joined the United States in its war effort in Iraq was coming together? The answer is 'yes.' Herding behavior drives negative and positive events. Yet people rarely see it this way. The problem is that 'bad' events – such as a sell-off in the stock markets – often happen faster than 'good' events, and people are more willing to ascribe a herd mentality to the quickly moving events.
Bob Prechter takes on this topic in relation to the financial markets in his groundbreaking work on socionomics, called The Wave Principle of Human Social Behavior. To learn more, read the excerpt below.
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Excerpted from The Wave Principle of Human Social Behavior, pages 395-397
Selling and Buying with the Crowd
Robert Schiller polled individual and institutional investors about why they sold stocks on October 19, 1987. Most of them admitted candidly that 'they sold because others were selling;' that is, they were herding.
It is welcome to have research telling us that the crash of 1987 was a 'psychological event.' However, no one ever thinks to poll investors about why they had bought stocks relentlessly throughout the preceding year. If any pollster did ask, the truth would be exactly the same, but the pollster would find little honesty about that fact, because in rising markets, people have plenty of time to let their neocoretexes formulate all kinds of rationalizations for herding action.
Panic is a faster-acting emotion than hope, and the neocortex is often stumped in coming up with an explanation for it. One of my favorite quotes in this regard, undoubtedly rushed out near press time, is this one from the Wall Street Journal: 'The U.S. dollar continued to decline yesterday despite economic news that could have been bullish for the currency if traders' mood weren't so bearish.'
If the Market Goes Down, It's Herding; If It Goes Up, It's ____?
Market commentators often blame a declining trend on herding, but they virtually never ascribe a rising trend to herding, as in this quote from a brokerage firm's director of investment strategy after a few weeks of price decline in a broad list of technology stocks: 'The herd mentality is taking over.' That is to say, herd mentality had nothing to do with the multi-year buying binge that preceded the decline.
The question is whether it is valid to assert, as it continually is, that psychology plays a part only in the crowd's stock-selling behavior and not its stock-purchasing behavior. A century ago, upon noticing that professional students of psychology made the same essential error n assigning only 'bad' behavior to the herd mentality, Gustave Le Bon asserted the duality of crowd behavior:
Hope Moves More Slowly Than Fear
The direction of some markets does determine, for most people, which impulsive emotion is involved. This is particularly true for stock prices, in which most people are betting on the upside. That is why uptrends look different from downtrends on a stock market graph. Hope is the fuel for advances in stocks and fear the fuel for declines. Hope, fear and complacency express themselves differently. Hope tends to build slowly, while fear often crystallizes swiftly. Nevertheless, they are both still emotions and so derive from the same motivational engine.
Regardless of which direction a market is trending, all of its governing emotions are generated by the herding impulse. In the most fundamental sense, the direction of prices does not change people's minds or their behavior. Their unconscious still follows the herd, expressing the form of the Wave Principle.
It's not necessary to visit a cattle ranch to find herding behavior. Consider this report from today's news: 'Two of America's allies in Iraq are withdrawing forces this month and a half-dozen others are debating possible pullouts or reductions, increasing pressure on Washington as calls mount to bring home U.S. troops.' (Associated Press, December 1, 2005)
Was it also herding behavior when the 'coalition of the willing' that joined the United States in its war effort in Iraq was coming together? The answer is 'yes.' Herding behavior drives negative and positive events. Yet people rarely see it this way. The problem is that 'bad' events – such as a sell-off in the stock markets – often happen faster than 'good' events, and people are more willing to ascribe a herd mentality to the quickly moving events.
Bob Prechter takes on this topic in relation to the financial markets in his groundbreaking work on socionomics, called The Wave Principle of Human Social Behavior. To learn more, read the excerpt below.
* * * * *
Excerpted from The Wave Principle of Human Social Behavior, pages 395-397
Selling and Buying with the Crowd
Robert Schiller polled individual and institutional investors about why they sold stocks on October 19, 1987. Most of them admitted candidly that 'they sold because others were selling;' that is, they were herding.
It is welcome to have research telling us that the crash of 1987 was a 'psychological event.' However, no one ever thinks to poll investors about why they had bought stocks relentlessly throughout the preceding year. If any pollster did ask, the truth would be exactly the same, but the pollster would find little honesty about that fact, because in rising markets, people have plenty of time to let their neocoretexes formulate all kinds of rationalizations for herding action.
Panic is a faster-acting emotion than hope, and the neocortex is often stumped in coming up with an explanation for it. One of my favorite quotes in this regard, undoubtedly rushed out near press time, is this one from the Wall Street Journal: 'The U.S. dollar continued to decline yesterday despite economic news that could have been bullish for the currency if traders' mood weren't so bearish.'
If the Market Goes Down, It's Herding; If It Goes Up, It's ____?
Market commentators often blame a declining trend on herding, but they virtually never ascribe a rising trend to herding, as in this quote from a brokerage firm's director of investment strategy after a few weeks of price decline in a broad list of technology stocks: 'The herd mentality is taking over.' That is to say, herd mentality had nothing to do with the multi-year buying binge that preceded the decline.
The question is whether it is valid to assert, as it continually is, that psychology plays a part only in the crowd's stock-selling behavior and not its stock-purchasing behavior. A century ago, upon noticing that professional students of psychology made the same essential error n assigning only 'bad' behavior to the herd mentality, Gustave Le Bon asserted the duality of crowd behavior:
Without a doubt criminal crowds exist, but virtuous and heroic crowds, and crowds of many other kinds, are also to be met with. The crimes of crowds only constitute a particular phase of their psychology. The mental constitution of crowds is not to be learnt merely by a study of their crimes, any more than that of an individual by a mere description of vices.
Hope Moves More Slowly Than Fear
The direction of some markets does determine, for most people, which impulsive emotion is involved. This is particularly true for stock prices, in which most people are betting on the upside. That is why uptrends look different from downtrends on a stock market graph. Hope is the fuel for advances in stocks and fear the fuel for declines. Hope, fear and complacency express themselves differently. Hope tends to build slowly, while fear often crystallizes swiftly. Nevertheless, they are both still emotions and so derive from the same motivational engine.
Regardless of which direction a market is trending, all of its governing emotions are generated by the herding impulse. In the most fundamental sense, the direction of prices does not change people's minds or their behavior. Their unconscious still follows the herd, expressing the form of the Wave Principle.