Life Cycle Model Of Crowd Behavior
by Henry O. Pruden, Ph.D.
For a large part of the past 30
years, the discipline of finance
has been under the aegis of the
efficient market hypothesis.
But in recent years, enough
anomalies have piled up, cracking
its dominance of the field.
As a consequence, the arrival
of new thinking to explain
market behavior has warranted
attention, and its name is behavioral
Behavioral finance proponents believe that markets reflect
the thoughts, emotions, and actions of normal people as
opposed to the idealized economic investor underlying the
efficient market school as well as fundamental analysis.
Behavioral man may intend to be rational, but that rationality tends to be hampered by cognitive biases, emotional quirks,
and social influences.
Behavioral finance uses psychology, sociology, and other
behavioral theories to explain and predict financial markets.
It also describes the behavior of investors and money managers.
In addition, it recognizes the roles that varying attitudes
play toward risk, framing of information, cognitive errors,
self-control and lack thereof, regret in financial decision-making,
and the influence of mass psychology.
Assumptions about the frailty of human rationality and the
acceptance of such drives as fear and greed have long been
accepted by students of technical analysis. Indeed, in his
Stock Market Behavior: The Technical Approach To Understanding
Wall Street, Harvey Krow classified technical analysis
in the behaviorist school of thought.