Tristan de Gouvion Saint Cyr

Tristan de Gouvion Saint Cyr on Behavioral Finance

Tristan de Gouvion Saint Cyr

Tristan de Gouvion Saint Cyr quotes wikipedia about a phenomenon that plays an important part in trading, called behavioral finance. This field studies the effects of social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation. The fields are primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights from psychology with neo-classical economic theory. Tristan de Gouvion Saint Cyr gives this video from Investpodia to illustrate the point:

Tristan de Gouvion Saint Cyr

As the pendulum swings between greed and fear, investors typically become overenthusiastic during bull markets and overdespondent as the bears growl grows louder. It stands to reason that in order to be a successful investor, it is important to distance yourself from the herd mentality and to take objective decisions based on fundamental reasons

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Tristan de Gouvion Saint Cyr

The typical behaviour of investors is linked to the so-called investor psychology cycle (courtesy RMB Unit Trusts), as illustrated below.

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Before seeking to apply the cycle to the present stock market situation, lets consider a short definition of each of the stages. Contempt: According to the cycle, a bull market typically starts when a market is at a low and investors scorn stocks. Doubt and suspicion: They try to decide whether what they have left should be invested in a safe haven such as a money market fund. They have burnt their fingers with stocks and vow never to invest again. Caution: The market then gradually starts showing signs of recovery. Most investors remain cautious, but prudent investors are already drooling at the possibility of profit.

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Confidence: As stock prices rise, investors feeling of mistrust changes to confidence and ultimately to enthusiasm. Most investors start buying their stocks at this stage. Enthusiasm: During the enthusiasm stage, prudent investors are already starting to take profits and get out of the stock market, because they realise that the bull market is coming to an end. Greed and conviction: Investors enthusiasm is followed by greed, which is often accompanied by numerous IPOs on the stock market. Indifference: Investors look beyond unsustainably high priceearnings ratios. Dismissal: As the market declines, investors show a lack or interest that quickly turns to dismissal.

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Denial: Then they reach the denial stage where they regularly affirm their belief that the market definitely cannot fall any further. Fear, panic and contempt: Concern starts to take a hold and fear, panic and despair soon follow. Investors again start scorning the market and once again they vow never to invest in stocks again. In order to determine where in the stock market cycle we find ourselves, the challenge is to identify the prevalent stage of the psychological cycle.

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I would, for starters, argue that we are on the right-hand side of the curve, but how far down the slippery slope sentiment has declined is less clear. It would seem that we are possibly in the region of the denial/fear/panic phases. Although enduring investor panic and fear have not really set in, the January, March and July sell-offs did witness climatic, albeit short-lived, bouts of despair. Time will tell whether we are dealing with a typical investor psychology cycle and how it will play itself out. It does, however, seem that we are at not at the contempt stage yet, i.e. when investors scorn shares en masse and a bull market typically starts. Realizing this mental process is the first step towards becoming a smarter, more rational investor.