On the Psychology of Stock Markets: Chickens on edge

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On the Psychology of Stock Markets: Chickens on edge

By Susan Trausch, Globe Staff, 4/16/2000

t's not cool to be tense about the portfolio, to keep looking backward at the unpleasantness of last week and the week before and fantasizing about stuffing the mutual fund account into the mattress.

Peter Lynch and Warren Buffett tell us to ride the markets for the long haul. But they can afford it.

Cool has never come so easily to the Wall Street chicken - that's an investor too scared to run with the bulls and too small to growl. A chicken scratches around in circles, knows the market is the place to put the hay, but jumps every time the tractor backfires.

And the bang can echo around the barn for weeks - years, really. The purebred chicken can still hear the voices of parents and grandparents at the dinner tables of childhood, retelling the tales of hardship and lessons of thrift learned in the Great Depression.

The chicken has relatives who still stockpile canned goods and toilet paper in the basement, prepared for what they fear will be the inevitable collapse of prosperity as we know it, because whenever people have it too good for too long the mighty arm of providence reaches down and demands their shirts.

Primitive thinking perhaps, but a fiscal psychologist understands.

''The bubble shrinks but it doesn't go away,'' says Jeffrey Heisler in calm, soothing tones.

He's an expert in behavioral finance at Boston University who peers into the psyche of the investor as intently as he watches the Bloomberg News wire. He doesn't buy the vision of an overheated market popping into oblivion like a giant balloon.

But he doesn't laugh at the fear.

''People are sitting on huge capital gains,'' he says. ''How they handle bad news depends on where they set their reference points.''

Someone with the soul of a riverboat gambler might invest $50, watch it turn into $200, and not twitch when it disolves into $75.

''That's because his reference point is $50, so he figures he's still ahead,'' Heisler explains.

''Somebody else, whose reference point is the $200, thinks he's losing money.''


And chicken country can begin at around $180.

With half of America now invested in the stock market, there's a whole lot of flapping going on, although people don't usually do that while standing around the water cooler, where everyone is trying to sound savvy, even now.

But the truth is the market and its investors are often illogical.

''People use the ICSIA (I Can't Stand It Anymore) index,'' says Paul Merriman, president of Merriman Capital Management in Seattle and editor of the FundAdvice.com Web site.

''They make purely emotional decisions.''

So when the entire world seems to be buying and getting rich, they ''can't stand it anymore'' and buy, too. Or they apply the illogic in reverse and sell when everyone's selling. This means the market goes up mainly because it's going up. And it comes down because it's coming down.

Putting it another way, just because you're a chicken doesn't mean the sky isn't falling.

Merriman smooths the psychic feathers by telling people to get a grip on their perspective and to understand the extraordinary acceleration driving the market.

He notes that the Nasdaq took 20 years to reach 1000, three years to hit 2000, one year to get to 3000, 17 weeks to reach 4000, and 10 weeks to hit 5000.

''We've been in a bull market so long that declines have been eliminated from the minds of many investors, particularly the young,'' he says.

Richard Geist, president of the Institute for Psychology and Investing, in Newton, observes that ''there will be severe corrections in the market,'' but given the speed of Internet Time, they won't last long and people won't feel the pain as sharply as they did in the old economy.

The chicken will try to keep an open mind about this. But the relatives are never going to buy it. Susan Trausch is a member of the Globe Staff. She can be reached at trausch@


-- Carl Jenkins (Somewherepress@aol.com), April 16, 2000

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