Fear vs. Greed

[aphexcoil]

After doing some long-term market research, I've noticed that portfolios and individual issues can go down much further than they can shoot up. A good example of this is the crash of 87 -- which sent the index down over 20% in a short time. There has never been an example of an index going up 20% in a day, though.

So, does this mean that humans are more susceptible to fear than to greed? Is fear the strongest motivator for market action?

 

[DHOHHI]

Quote from aphexcoil:

After doing some long-term market research, I've noticed that portfolios and individual issues can go down much further than they can shoot up. A good example of this is the crash of 87 -- which sent the index down over 20% in a short time. There has never been an example of an index going up 20% in a day, though.

So, does this mean that humans are more susceptible to fear than to greed? Is fear the strongest motivator for market action?

I don't think taking just a couple data points would be representative statistically. The October 1987 crash was a statistical anomaly IMO. More representative of significant down days would be declines of 3-5%. And we also have up days that fall in the same range ... just last year 7/29 we were up 447 on the Dow and up 73 on the NASDAQ; certainly more days like that also. I do think panic exacerbates the fear side whereas that may not be as relevant on a "greed" type day.

 

[trader99]

Quote from aphexcoil:

After doing some long-term market research, I've noticed that portfolios and individual issues can go down much further than they can shoot up. A good example of this is the crash of 87 -- which sent the index down over 20% in a short time. There has never been an example of an index going up 20% in a day, though.

So, does this mean that humans are more susceptible to fear than to greed? Is fear the strongest motivator for market action?

To some extent that's probably true. But greed is also a strong force and that's what caused the tech bubble as well as ALL bubbles before that.

But the question you are asking or trying to answer is whether there is an asymmetrical imbalance between these fundamental forces and if so is there statistical proof of such existence.

Roughtly on a market semi-microstructure note, I guess you can say fear is pretty strong. Because after the '87 crash, we observed the "smile effect" on the term structure of implied volatilities in option prices. This skewing of distribution is a rough statistical fingerprint that the market is more afraid of fear than before 1987 crash and thus pricing a higher premium for certain option chains.

good luck!

trader99

 

[aphexcoil]

Quote from DHOHHI:



I don't think taking just a couple data points would be representative statistically. The October 1987 crash was a statistical anomaly IMO. More representative of significant down days would be declines of 3-5%. And we also have up days that fall in the same range ... just last year 7/29 we were up 447 on the Dow and up 73 on the NASDAQ; certainly more days like that also. I do think panic exacerbates the fear side whereas that may not be as relevant on a "greed" type day.

Is the October '87 crash a true statistical anomaly or just a great example of the fat tails in the normal distribution of percent changes for stocks? Why haven't there been any 20+% upside anomalies?

It seems like the fear aspect of the market happens suddenly while the "irrational exuburance" mode of the market goes unabated for quite some time until the bubble pops. Not a lot of people were predicting the end of the bubble while it was still expanding -- investment advisors were just too busy telling investors that they were in the "new economy" and to just keep pumping money into tech issues.

 

[alfonso]

I think it's possible that a basic aspect of human behavior might help to explain such occurrences: I think it's generally true to say that a person will do more prevent losing what he already has than he would to gain more than what he already has.

 

[ElCubano]

Quote from alfonso:

I think it's possible that a basic aspect of human behavior might help to explain such occurrences: I think it's generally true to say that a person will do more prevent losing what he already has than he would to gain more than what he already has.

but they say that, people are quicker to take profits than they are to take a loss.....

 

[Magister Ludi]

Fear vs. misses the mark; greed is a manifestation of fear...

 

[harrytrader]

Building takes more time than destroying: this is the entropic law and its assymetry . The crash in 1987 is profit taking after building the mania in a staircase fashion. This is classical just read Jesse Livermore he illustrates how trend is built in this manner by manipulators like him when he was paid to do so. Nevertheless Jesse Livermore doesn't give you my equations hee hee

The trend is composed of the crowd, whereas the profit taking is composed by the initiates which are much fewer and much more powerful: the mass has an inertia because it is heteregeous population, you cannot build the trend by just telling them buy they must be appealed to do so little by little and build confidence within them so that at the top they don't even ask themselves if it will continue . Confidence comes from repetition so from time. People extrapolate because in mathematical books at school they were told to do so but reality is different.