a large role in the determination of asset prices.4 Shiller showed that stock prices have been far toovolatile to be explained by fluctuations in economic factors, such as dividends or earnings.5 He has hypothesized that much of the extra volatility can be explained by fads and fashions that have a large impact oninvestor decisions.Dave: I did have my doubts about these Internet stocks, but everyoneelse seemed so sure they were winners.IC: Note how others influenced your decision against your better judgment. Psychologists have long known how hard it is to remain separatefrom a crowd. This was confirmed by a social psychologist namedSolomon Asch. He conducted a famous experiment where subjects werepresented with four lines and asked to pick the two that were the samelength. The right answer was obvious, but when confederates of Dr. Aschpresented conflicting views, the subjects often gave the incorrect answer.63Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,”Econometrica, vol. 47, no. 2 (March 1979).4Robert Shiller, “Stock Prices and Social Dynamics,” Brookings Papers on Economic Activity, Washington, D.C.: Brookings Institution, 1984.5Robert Shiller, “Do Stock Prices Move Too Much to Be Justified by Subsequent Movements in Dividends?” American Economic Review, vol. 71, no. 3 (1981), pp. 421–436. See Chapter 16 for further discussion.6Solomon Asch, Social Psychology, Englewood Cliffs, N.J.: Prentice Hall, 1952.
324
PART 4 Stock Fluctuations in the Short Run
Follow-up experiments confirmed that it was not social pressurethat led the subjects to act against their own best judgment but their disbelief that a large group of people could be wrong.7Dave: Exactly, so many were hyping these stocks that I felt there had tobe something there. If I didn’t buy the Internet stocks, I thought that Iwas missing out.IC: I know. The Internet and technology bubble is a perfect example ofsocial pressures influencing stock prices. The conversations around theoffice, the newspaper headlines, and the analysts’ predictions—they allfed the craze to invest in these stocks. Psychologists call this penchant tofollow the crowd the herding instinct—the tendency of individuals toadapt their thinking to the prevailing opinion.The Internet bubble has many precedents. In 1852, Charles Mackaywrote the classic Extraordinary Delusions and the Madness of Crowds,which chronicled a number of financial bubbles during which speculators were driven into a frenzy by the upward movement of prices: theSouth Sea bubble in England and the Mississippi bubble in Francearound 1720 and the tulip mania in Holland a century earlier.8Let me read you my favorite passage from the book. See if you canrelate with this:We find that whole communities suddenly fix their minds upon one subject, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion and run after it. . . . Sober nations haveall at once become desperate gamblers, and risked most of their existenceupon the turn of a piece of paper. . . . Men, it has been well said, think inherds. . . . They go mad in herds, while they only recover their sensesslowly and one by one.
Dave (shaking his head): This happens again and again through history.Even though others were pointing to those very same excesses last year,I was convinced that “this time is different.”IC: As were many others. The propensity of investors to follow the crowdis a permanent fixture of financial history. There are many times when the“crowd” is right,9 but often following the crowd can lead you astray.7Morton Deutsch and Harold B. Gerard, “A Study of Normative and Informational Social Influences upon Individual Judgment,” Journal of Abnormal and Social Psychology, vol. 51 (1955), pp.629–636.8Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowd, London:Bentley, 1841.9See James Surowiecki, The Wisdom of Crowds, New York: Anchor Books, 2005.
CHAPTER 19 Behavioral Finance and the Psychology of Investing
325
Dave, have you ever been in a new town and found yourself choosing between two restaurants? One perfectly rational way of deciding, ifthey are close in distance, is to see which restaurant is busier sincethere’s a good chance that at least some of those patrons have tried bothrestaurants and have chosen to eat at the better one. But when you eat atthe busier restaurant, you are increasing the chance that the next diner,using the same reasoning, will also eat there, and so on. Eventually,everybody will be eating at that one restaurant even though the otherone could be much better.Economists call this decision-making process an information cascade,and they believe that it happens often in financial markets.10 For example, when one company bids for another, often other suitors will join in.When an IPO gets a strong following, other investors join in. Individualshave a feeling that “someone knows something” and that they shouldn’tmiss out. Sometimes that’s right, but very often that is wrong.
Excessive Trading, Overconfidence, and the Representative BiasIC: Dave, let me shift the subject. From examining your trading records,I see that you were an extremely active trader.Dave: I had to be. Information was constantly bombarding the market; I feltI had to reposition my portfolio constantly to reflect the new information.IC: Let me tell you something. Trading does nothing but cause extra anxiety and lower returns. A couple of economists published an article in2000 called “Trading Is Hazardous to Your Wealth.” (And, I may add, toyour health also.) Examining the records of tens of thousands of traders,they showed that the returns of the heaviest traders were 7.1 percentbelow those who traded infrequently.11Dave: You’re right. I think trading has hurt my returns. I thought that Iwas one step ahead of the other guy, but I guess I wasn’t.IC: It is extraordinarily difficult to be a successful trader. Even brightpeople who devote their entire energies to trading stocks rarely makesuperior returns.10
Robert Shiller, “Conversation, Information, and Herd Behavior,” American Economic Review, vol.85, no. 2 (1995), pp. 181–185; S. D. Bikhchandani, David Hirshleifer, and Ivo Welch, “A Theory ofFashion, Social Custom and Cultural Change,” Journal of Political Economy, vol. 81 (1992), pp.637–654; and Abhijit V. Banerjee, “A Simple Model of Herd Behavior,” Quarterly Journal of Economics, vol. 107, no. 3 (1992), pp. 797–817.11Brad Barber and Terrance Odean, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,” Journal of Finance, vol. 55 (2000), pp. 773–806.
326
PART 4 Stock Fluctuations in the Short Run
The problem is that most people are simply overconfident in theirown abilities. To put it another way, the average individual—whether astudent, a trader, a driver, or anything else—believes he or she is betterthan average, which of course is statistically impossible.12Dave: What causes this overconfidence?IC: Overconfidence comes from several sources. First, there is what wecall a self-attribution bias that causes one to take credit for a favorable turnof events when credit is not due.13 Remember in March 2000 bragging toyour wife about how smart you were to have bought those Internetstocks?Dave: Yes. And was I wrong!IC: Your early success fed your overconfidence.14 You and your friendsattributed your stock gains to skillful investing, even though those outcomes were frequently the result of chance.Another source of overconfidence comes from the tendency to seetoo many parallels between events that seem the same.15 This is calledthe representative bias. This bias actually arises because of the humanlearning process. When we see something that looks familiar, we form arepresentative heuristic to help us learn. But the parallels we see areoften not valid, and our conclusions are misguided.Dave: The investment newsletters I get say that every time such-andsuch event has occurred in the past, the market has moved in a certaindirection, implying that it is bound to do so again. But when I try to usethat advice, it never works.IC: Conventional finance economists have been warning for years aboutfinding patterns in the data when in fact there are none. Searching pastdata for patterns is called data mining, and it is easier than ever to do
12
B. Fischhoff, P. Slovic, and S. Lichtenstein, “Knowing with Uncertainty: The Appropriateness ofExtreme Confidence,” Journal of Experimental Psychology: Human Perception and Performance, vol. 3(1977), pp. 552–564.13A. H. Hastorf, D. J. Schneider, and J. Polefka, Person Perception, Reading: Mass.: Addison-Wesley,1970.14For reference to a model that incorporates success as a source of overconfidence, see Simon Gervais and Terrance Odean, “Learning to Be Overconfident,” Review of Financial Studies, vol. 14, no. 1(2001), pp. 1–27.15For references to models that incorporate the representative heuristic as a source of overconfidence, see either N. Barberis, A. Shleifer, and R. Vishny, “A Model of Investor Sentiment,” NationalBureau of Economic Research (NBER) Working Paper No. 5926, NBER, Cambridge, Mass., 1997, orKent Daniel, David Hirshleifer, and Avandihar Subrahmanyam, “Investor Psychology and SecurityMarket Under- and Overreactions,” Journal of Finance, vol. 53 no. 6 (1998), pp. 1839–1886.
CHAPTER 19 Behavioral Finance and the Psychology of Investing
327
with computing power becoming so cheap.16 Throw in a load of variables to explain stock price movements and you are sure to find somespectacular fits—like over the past 100 years stocks have risen on everythird Thursday of the month when the moon is full!The representative bias has been responsible for some spectacularlywrong moves in the stock market, even when the situations seem remarkably similar. When World War I broke out in July 1914, officials atthe New York Stock Exchange thought it was such a calamity that the exchange closed down for five months. Wrong! The United States becamethe arms merchant for Europe; business boomed, and 1915 was one ofthe single best years in stock market history.When Germany invaded Poland in September 1939, investorslooked at the behavior of the market during World War I. Noting the fantastic returns, they bought stocks like mad and sent the market up bymore than 7 percent on the next day’s trading! But this was wrong again.FDR was determined not to let the corporations prosper from World WarII as they had from World War I. After a few more up days, the stockmarket headed into a severe bear market, and it wasn’t until nearly sixyears later that the market returned to its September 1939 level. Clearly,the representative bias was the culprit for this error, and the two eventsweren’t as similar as people thought.Psychologically, human beings are not designed to accept all therandomness that is out there. It is very discomforting for many to learnthat most movements in the market are random and do not have anyidentifiable cause or reason. Individuals possess this deep psychologicalneed to know why something happens. That is where the reporters and“experts” come in. They are more than happy to fill the holes in ourknowledge with explanations that are wrong more often than not.Dave: I can relate personally to this representative bias. I remember thatbefore I bought the technology stocks in July 2000, my broker comparedthese companies to the suppliers providing the gear for the gold rushersof the 1850s. It seemed like an insightful comparison at the time, but infact the situations were very different. It is interesting that my broker,who is supposed to be the expert, is subject to the same overconfidencethat I am.IC: There is actually evidence that experts are even more subject to overconfidence than the nonexperts. The so-called experts have been trained16
For a reference to data mining, see Andrew Lo and Craig MacKinlay, “Data-Snooping Biases inTests of Financial Asset Pricing Models,” Review of Financial Studies, vol. 3, no. 3 (Fall 1999), pp.431–467.
328
PART 4 Stock Fluctuations in the Short Run
to analyze the world in a particular way, and they sell their advice basedon finding supporting—not contradictory—evidence.17Recall the failure of analysts in 2000 to change their earnings forecasts for the technology sector despite the news that suggested thatsomething was seriously wrong with their view of the whole industry.After being fed an upbeat outlook by corporations for many years, analysts had no idea how to interpret the downbeat news, so most just ignored it.The propensity to shut out bad news was even more pronouncedamong analysts in the Internet sector. Many were so convinced thatthese stocks were the wave of the future that, despite the flood of ghastlynews, many downgraded these stocks only after they had fallen 80 or 90percent!The predisposition to disregard news that does not correspond toone’s worldview is called cognitive dissonance. Cognitive dissonance isthe discomfort we encounter when we confront evidence that conflictswith our view or suggests that our abilities or actions are not as a goodas we thought. We all display a natural tendency to minimize this discomfort, which makes it difficult for us to recognize our overconfidence.
Prospect Theory, Loss Aversion, and Holding On to Losing TradesDave: I see. Can we talk about individual stocks? Why do I end up holding so many losers in my portfolio?IC: Remember I said before that Kahneman and Tversky had kicked offbehavioral finance with prospect theory? A key point in their theory wasthat individuals form a reference point from which they judge their performance. They found that from that reference point individuals aremuch more upset about losing a given amount of money than they arefrom gaining the same amount. They called this behavior loss aversion,and they suggested that the decision to hold or sell an investment will bedramatically influenced by whether your stock has gone up or down—in other words, whether you have had a gain or loss.Dave: One step at a time. What is this “reference point” you talk about?IC: Let me ask you a question. When you buy a stock, how do you trackits performance?Dave: I calculate how much the stock has gone up or down since Ibought it.17
David Dreman, Contrarian Investment Strategies.
CHAPTER 19 Behavioral Finance and the Psychology of Investing
329
IC: Exactly. Often the reference point is the purchase price that investorspay for the stock. Investors become fixated on this reference point to theexclusion of any other information. Richard Thaler from the Universityof Chicago, who has done seminal work in investor behavior, refers tothis as mental accounting.18When you buy a stock, you open a mental account with the purchase price as the reference point. Similarly, when you buy a group ofstocks together, you will either think of the stocks individually or youmay aggregate the accounts together.19 Whether your stocks are showinga gain or loss will influence your decision to hold or sell the stock. Moreover, in accounts with multiple losses, you are likely to aggregate individual losses together because thinking about one big loss is an easierpill for you to swallow than thinking of many smaller losses. Avoidingthe realization of losses becomes the primary goal of many investors.Dave: You’re right. The thought of realizing those losses on my technology stocks petrified me.IC: That is a completely natural reaction. Your pride is one of the mainreasons why you avoided selling at a loss. Every investment involves anemotional as well as financial commitment that makes it hard to evaluate objectively. You felt good that you sold out of your Internet stockswith a small gain, but the networking stocks you subsequently boughtnever showed a gain. Even as prospects dimmed, you not only hung onto those stocks but bought more, hoping against hope that they wouldrecover.Prospect theory predicts that many investors will do as you did—increase your position, and consequently your risk, in an attempt to geteven.20Dave: Yes. I thought that buying more stock would increase my chancesof recouping my losses.IC: You and millions of other investors. In 1982, Leroy Gross wrote amanual for stockbrokers in which he called this phenomenon the “geteven-itis disease.”21 He claimed get-even-itis has probably caused moredestruction to portfolios than any other mistake.18
Richard Thaler, “Mental Accounting and Consumer Choice,” Marketing Science, vol. 4, no. 3 (Summer 1985), pp. 199–214.19Richard H Thaler, “Mental Accounting Matters,” Journal of Behavioral Decision Making, vol. 12(1999), pp. 183–206.20Hersh Shefrin and Meir Statman, “The Disposition to Sell Winners Too Early and Ride Losers TooLong: Theory and Evidence,” Journal of Finance, vol. 40, no. 3 (1985), pp. 777–792.21Leroy Gross, The Art of Selling Intangibles, New York: New York Institute of Finance, 1982.
330
PART 4 Stock Fluctuations in the Short Run
It is hard for us to admit we’ve made a bad investment, and it iseven harder for us to admit that mistake to others. But to be a successfulinvestor, you have no choice but to do so. Decisions on your portfoliomust be made on a forward-looking basis. What has happened in the pastcannot be changed. It is a “sunk cost,” as economists say. Whenprospects don’t look good, sell the stock whether or not you have a loss.Dave: I thought the stocks were cheap when I bought more shares.Many were down 50 percent or more from their highs.IC: Cheap relative to what? Cheap relative to their past price or their future prospects? You thought that a price of 40 for a stock that had been80 made the stock cheap, yet you never considered the possibility that 40was still too high. This demonstrates another one of Kahneman andTversky’s behavioral findings: anchoring, or the tendency of people facing complex decisions to use an “anchor” or a suggested number to formtheir judgment.22 Figuring out the “correct” stock price is such a complextask that it is natural to use the recently remembered stock price as ananchor and then judge the current price a bargain.Dave: If I follow your advice and sell my losers whenever prospects aredim, I’m going to register a lot more losses on my trades.IC: Good! Most investors do exactly the opposite and realize poor returns. Research has shown that investors sell stocks for a gain 50 percentmore frequently than they sell stocks for a loss.23 This means that stocksthat are above their purchase price are 50 percent more likely to be soldthan stocks that show a loss. Traders do this even though it is a horriblestrategy from a tax standpoint.Let me tell you of one short-term trader I successfully counseled.He showed me that 80 percent of his trades made money, but he wasdown overall since he had lost so much money on his losing trades thatthey drowned out his winners.After I counseled him, he became a successful trader. Now he saysthat only one-third of his trades make money, but overall he’s wayahead. When things don’t work out as he planned, he gets rid of losingtrades quickly while holding on to his winners. There is an old adage onWall Street that sums up successful trading: “Cut your losers short andlet your winners ride.”
22
Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science, vol. 185 (1974), pp. 1124–1131.23Terrance Odean, “Are Investors Reluctant to Realize Their Losses,” Journal of Finance, vol. 53, no.5 (October 1998), p. 1786.
CHAPTER 19 Behavioral Finance and the Psychology of Investing
331
Rules for Avoiding Behavioral TrapsDave: I don’t feel secure enough to trade again soon. I just want to learnthe right longer-term strategy. How can I get over these behavioral trapsand be a successful long-term investor?IC: Dave, I’m glad you are not trading, since trading is right for only avery small fraction of my clients.To be a successful long-term investor, you must set up rules and incentives to keep your investments on track—this is called precommitment.24 Set an asset allocation rule and then stick to it. If you haveenough knowledge, you can do this yourself or else with an investmentadvisor. Don’t try to second-guess your rule. Remember that the basicfactors generating returns change far less than we think as we watch theday-to-day ups and downs of the market. A disciplined investmentstrategy is almost always a winning strategy.If you wish, you don’t have to eliminate your trading altogether. Ifyou do buy stocks for a short-term trade, set up a stop-loss order to minimize your losses. You don’t want to let your losses mount, rationalizingthat the stock will eventually come back. Also, don’t tell your friendsabout your trades. Living up to their expectations will make you evenmore reluctant to take a loss and admit that you were wrong.Dave: I’ll have to admit that I sometimes enjoyed trading.IC: If you really enjoy trading, set up a small trading account that is completely separate from the rest of your portfolio. All brokerage costs andall taxes must be paid from this account. Consider that the money youput into this trading account may be completely lost because it very wellmay be. And you should never consider exceeding the rigid limit youplace on how much money you put into that account.If that doesn’t work, or if you feel nervous about the market or havea compulsion to trade, call me, I can help. And according to news reports, there are some reformed traders who are establishing Traders’Anonymous (TA) programs designed to help people who cannot resistthe temptations of trading too frequently.25 Maybe you should look intothose.
24
Hersh Shefrin and Richard Thaler, “An Economic Theory of Self-Control,” Journal of Political Economy, vol. 89, no. 21 (1981), pp. 392–406.
25
See Paul Sloan, “Can’t Stop Checking Your Stock Quotes,” U.S. News & World Report, July 10, 2000.
332
PART 4 Stock Fluctuations in the Short Run
Myopic Loss Aversion, Portfolio Monitoring,and the Equity Risk PremiumDave: Because of how badly I was doing in the market, I even considered giving up on stocks and sticking with bonds, although I know thatin the long run that is a very bad idea. How often do you suggest that Imonitor my stock portfolio?IC: Important question. If you buy stocks, it is very likely that the valuewill drop below the price you paid, if but for a short time soon after yourpurchase. We have already spoken about how loss aversion makes thisdecline very disturbing. However, since the long-term trend in stocks isupward, if you wait some period of time before checking your portfolio,the probability that you will see a loss decreases.Two economists tested whether the “monitoring interval” affectedthe choice between stocks and bonds.26 They conducted a “learning experiment” in which they allowed individuals to see the returns on twounidentified asset classes. One group was shown the yearly returns onstocks and bonds, and other groups were shown the same returns, butinstead of annually, the returns were aggregated over periods of 5, 10,and 20 years. The groups were then asked to pick an allocation betweenstocks and bonds.The group that saw yearly returns invested a much smaller fractionin stocks than the groups that saw returns aggregated into longer intervals. This was because the short-term volatility of stocks dissuaded people from choosing that asset class, even though over longer periods itwas clearly a better choice.This tendency to base decisions on the short-term fluctuations inthe market has been referred to as myopic loss aversion. Since over longerperiods, the probability of stocks showing a loss is much smaller, investors influenced by loss aversion would be more likely to hold stocksif they monitored their performance less frequently.Dave: That’s so true. When I look at stocks in the very short run, theyseem so risky that I wonder why anyone holds them. But over the longrun, the superior performance of equities is so overwhelming, I wonderwhy anyone doesn’t hold stocks!IC: Exactly. Shlomo Bernartzi and Richard Thaler claim that myopic lossaversion is the key to solving the equity premium puzzle.27 For years, econ26
Shlomo Bernartzi and Richard Thaler, “Myopic Loss Aversion and the Equity Premium Puzzle,”Quarterly Journal of Economics, 1995, pp. 73–91.27See Chapter 8 for a further description of the equity premium puzzle.
CHAPTER 19 Behavioral Finance and the Psychology of Investing
333
omists have been trying to figure out why stocks have returned so muchmore than fixed-income investments. Studies show that over periods of20 years or more, a diversified portfolio of equities not only offers higherafter-inflation returns but is actually safer than government bonds. Butbecause investors concentrate on an investment horizon that is too short,stocks seem very risky and investors must be enticed to hold stocks witha fat premium. If investors evaluated their portfolio less frequently, theequity premium might fall dramatically.Bernartzi and Thaler have shown that the high equity premium isconsistent with myopic loss aversion and yearly monitoring of returns.But they also showed that if investors had evaluated their portfolio allocation only once every 10 years, the equity premium needed to be only 2percent to entice investors into stocks. With an evaluation period of 20years, the premium fell to only 1.4 percent, and it would have been closeto 1 percent if the evaluation period were 30 years. Stock prices wouldhave had to rise dramatically to reduce the premium to these low levels.Dave: Are you saying that perhaps I should not look at my stocks toofrequently?IC: You can look at them all you want, but don’t alter your long-termstrategy. Remember to set up rules and incentives. Commit to a long-runportfolio allocation, and do not alter it unless there is significant evidence that a certain sector is becoming greatly overpriced relative to itsfundamentals, as the technology stocks did at the top of the bubble.
Contrarian Investing and Investor Sentiment:Strategies to Enhance Portfolio ReturnsDave: Is there a way for an investor to take advantage of others’ behavioral weakness and earn superior returns from them?IC: Standing apart from the crowd might be quite profitable. An investorwho takes a different view is said to be a contrarian, one who dissentsfrom the prevailing opinion. Contrarian strategy was first put forth byHumphrey B. Neill in a pamphlet called “It Pays to Be Contrary,” firstcirculated in 1951 and later turned into a book entitled The Art of Contrary Thinking. In it Neill declared: “When everyone thinks alike, everyone is likely to be wrong.”28Some contrarian approaches are based on psychologically driven indicators such as investor “sentiment.” The underlying idea is that most28
Humphrey B. Neill, The Art of Contrary Thinking, Caldwell, Idaho: Caxton Printers, 1954, p. 1.
334
PART 4 Stock Fluctuations in the Short Run
investors are unduly optimistic when stock prices are high and undulypessimistic when they are low.This is not a new concept either. The great investor Benjamin Graham stated more than 70 years ago, “[T]he psychology of the speculatormilitates strongly against his success. For by relation of cause and effect,he is most optimistic when prices are high and most despondent whenthey are at bottom.”29Dave: But how do I know when the market is too pessimistic and too optimistic? Is that not subjective?IC: Not entirely. Investors Intelligence, a firm based in New Rochelle,New York, publishes one of the long-standing indicators of investmentsentiment. Over the past 40 years, the company has evaluated scores ofmarket newsletters, determining whether each letter is bullish, bearish,or neutral about the future direction of stocks.From Investors Intelligence data, I computed an index of investorsentiment by finding the ratio of bullish newsletters to bullish plus bearish newsletters (omitting the neutral category). I then measured the returns on stocks subsequent to these sentiment readings.The results, shown in Table 19-1, indicate a strong predictive content to the sentiment index. Whenever the index of investor sentiment ishigh, subsequent returns on the market are poor, and when the index islow, subsequent returns are above average. The index is a particularlystrong predictor of market return over the next 9 to 12 months.The sentiment indicator since January 1986 is plotted in Figure 191. The crash of October 1987 was accompanied by investor pessimism.For the next few years, whenever the market went down, as it did inMay and December 1988 and February 1990, investors feared anothercrash, and sentiment dropped sharply. Bullish sentiment also fell below50 percent during the Iraqi invasion of Kuwait, the bond market collapseof 1994, the Asian crisis of October 1997, the LTCM bailout of the latesummer of 1998, the terrorist attacks of September 2001, and the marketbottom of October 2002. These have all been excellent times to invest.It is of note that the VIX Index, the measure of implied marketvolatility computed from options prices, spikes upward at virtually thesame time investor sentiment plunges.30 Anxiety in the market, whichcan be measured from the premiums on put options, is strongly negatively correlated with investor sentiment.2930
Benjamin Graham and David Dodd, Security Analysis, 1st ed., New York: McGraw-Hill, 1934, p. 12.A discussion of the VIX Index is found in Chapter 16.
CHAPTER 19 Behavioral Finance and the Psychology of Investing
TABLE
335
19–1
Investor Confidence and Subsequent Dow Price Returns: Sentiment = Bull/(Bull + Bear)Bull and Bear from Investors Intelligence, New Rochelle, New York
1970 - 2006Sentiment0.2 - 0.30.3 - 0.40.4 - 0.50.5 - 0.60.6 - 0.70.7 - 0.80.8 - 0.90.9 - 1.0Overall
Frequency1.14%8.34%15.28%27.29%27.60%15.95%3.83%0.57%100.00%
1990 - 2006Sentiment.30 - .35.35 - .40.40 - .4