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Other research has shown that psychological factors may result in exaggerated stock price movements. Psychological research

has demonstrated that people are predisposed to ‘seeing’ patterns, and often will perceive a pattern in what is, in fact, just

noise. (Something like seeing familiar shapes in clouds or ink blots.) In the present context this means that a succession of

good news items about a company may lead investors to overreact positively (unjustifiably driving the price up). A period of

good returns also boosts the investor’s self-confidence, reducing his (psychological) risk threshold.[5]

Another phenomenon—also from psychology—that works against an objective assessment is group thinking. As social animals,

it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may

be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by

those of others in the group.

In one paper the authors draw an analogy with gambling.[6] In normal times the market behaves like a game of roulette; the

probabilities are known and largely independent of the investment decisions of the different players. In times of market stress,

however, the game becomes more like poker (herding behavior takes over). The players now must give heavy weight to the

psychology of other investors and how they are likely to react psychologically.

The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance

and support they need. In the period running up to the recent Nasdaq crash, less than 1 percent of the analyst’s

recommendations had been to sell (and even during the 2000 – 2002 crash, the average did not rise above 5%). The media

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