- The stock or index continues up for a brief time. You manage to hold on until just after it turns down, and sell so that you get out near the top. (You didn’t buy low, but you sold it for more than you paid and made some money.)
- It goes up and then down, and then up and down again — and again — while you agonize. You read whatever you can find to help decide whether to stay in or get out. You finally get out about where you got in. (You neither bought low nor sold high, nor did you make any money.)
- It turns down after you purchase it. And it keeps drifting down until you can’t stand it anymore. So you sell. (You bought high and sold low; depending on how long you held it, you lost a little or a lot of money.)
“The process is being driven by an emotional, unconscious response by investors who look at the market subjectively and impulsively and who must make decisions under conditions of ignorance and uncertainty.… Most people tend to engage in what we call herding. They follow the actions of others, whether those others are on the right side of the market or not.“The result is that prices move up and down according to investors’ optimism and pessimism. Investors use the news to rationalize their emotional decisions, and most people lose money.”
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