Seven
Psychological Anchors for the Market

We have seen that the market is not well anchored by fundamentals. People do not even know to any degree of accuracy what the “right” level of the market is: not many of them spend much time thinking about what its level should be or whether it is over- or underpriced today. So what is it that ties down the market's level on any given day? What anchors the market? What is it that determines whether the Dow Jones Industrial Average is at 4,000 or 14,000? What ultimately limits the feedback from price changes to further price changes that amplifies speculative price movements? Why does the market stay within a certain region for days at a time, only to break out suddenly? We have already seen some partial answers to these questions, but to understand the true nature of the anchors at work here, we must also turn to psychology.

In considering lessons from psychology, it must be noted that many popular accounts of the psychology of investing are simply not credible. Investors are said to be euphoric or frenzied during booms or panic-stricken during market crashes. In both booms and crashes, investors are described as blindly following the herd like so many sheep, with no minds of their own. Belief in the rationality

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