Chapter 5. Trying to Predict the Market

Author: Shefrin, Hersh

Source: Beyond Greed and Fear, October 2002 , pp. 45-59(15)

Publisher: Oxford Scholarship Online Monographs

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Abstract:

Wall Street strategists are susceptible to gambler's fallacy. In general, four important behavioral elements affect the market predictions of investors: overconfidence, betting on trends, anchoring and adjustment, and salience. Although gambler's fallacy generally afflicts Wall Street strategists, it typically does not afflict individual investors and technical analysts—they succumb to other errors. This point leads to a discussion about some of the key illusions that most people have about randomness, and why these illusions bias their predictions. Inflation adds an additional element of confusion.

Keywords: overconfidence; Wall Street strategists; technical analysis; illusions about randomness; gambler's fallacy; betting on trends; salience; fundamental analysis; anchoring and adjustment

Document Type: Research article

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