Holy grail............

I reproduce a part of an article which i found in the net.......makes good reading for those who have grey cells.......and for those who thinks that stock market is NOT a casino


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According to LeBon,

"In it's ordinary sense the word 'crowd' means a gathering of individuals of whatever nationality, profession, or sex, and whatever be the chances that have brought them together. From the psychological point of view the expression 'crowd' assumes quite a different signification. Under certain given circumstances, and only under those circumstances, an agglomeration of men presents new characteristics very different from those of the individuals composing it. The sentiments and ideas of all the persons in the gathering take one and the same direction, and their conscious personality vanishes. A collective mind is formed, doubtless transitory, but presenting very clearly defined characteristics. The gathering has thus become what, in the absence of a better expression, I will call an organized crowd, or, if the term is considered preferable, a psychological crowd. It forms a single being, and is subjected to the law of the mental unity of crowds."

"The most striking peculiarity presented by a psychological crowd is the following: Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think and act were he in a state of isolation."

"The psychological crowd" is a provisional being formed heterogeneous elements, which for a moment are combined, exactly as the cells which constitute a living body form by their reunion a new being which displays characteristics very different from those possessed by each of the cells singly.

"This very fact that crowds possess in common ordinary qualities explains why they can never accomplish acts demanding a high degree of intelligence."

"In crowds it is stupidity and not mother-wit that is accumulated."

LeBon presumably knew nothing about the stock market, and probably could not have cared less. But it so happened that shortly after I "discovered" LeBon, an edition of Charles Mackay's "Extraordinary Popular Delusions and the Madness Crowds" (originally published in 1841) appeared with a forward by Bernard M. Baruch.

Mr. Baruch Said:

"All economic movements, by their very nature, are motivated by crowd psycology. Graph and business ratio are, of course, indispensable in our groping efforts to find dependable rules to guide us in our present world of alarms. Yet I never see a brilliant economic thesis expounding, as though they were geometrical theorems, the mathematics of price movements, that I do not recall Schiller's dictum: 'Anyone taken as an individual, is tolerably sensible and reasonable---as a member of a crowd, he at once becomes a blockhead. Without due recognition of crowd-thinking (which often seems crowd-madness) our theories of economics leave much to be desired."

"I have always thought that if, in the lamentable era of the 'New Economics,' culminating in 1929, even in the very presence of dizzily spiraling prices, we had all continuously repeated, "two and two still make four," much of the evil might have been averted. Similarly, even in the general moment of gloom in which this forward is written, when many begin to wonder if declines will never halt, the appropriate abracadabra may be: "They always did."

This had to be it. The stock market was essentially nothing more or less than a manifestation of mass or crowd psychology in action.

This contention is one I have repeated time and again, in many ways, in my writing and speeches. In short, the stock market reflects the changing moods, emotions and feelings of the mass of investors.

As such it leads a life of its own, albeit a vicarious life, which mirrors and reflects the changing sentiments of the crowd of investors.

A crowd, as I define it, is any group with a common purpose or interest. The intelligence(?) of the crowd is not the average intelligence of the individuals. The individual sinks to the level of the crowd, which is quite separate from, and below the intelligence of the individuals.

Crowds do not think. The do not reason. They simply react, animalistically and emotionally.

As a near-perfect example of what I mean, and something to which almost anyone can relate, the following example is cited: You're alone in an empty movie theater and hear the cry of "fire." You look around, see no flames, smell no smoke. You calmly walk to the nearest exit.

Repeat the same cry of "fire" (again without flames visible or the smell of smoke) in a crowded theater and once the crowd starts running for an exit, you'll find yourself running too. That's crowd psychology.

And all subsequent experience has confirmed that the stock market is essentially a manifestation of crowd psychology in action--- the resultant of the changing moods, feelings, sentiments and emotions of the "crowd" of investors.

So, I came to the conclusion, a conclusion that has since become a conviction, that the stock market is essentially the result of three sets of factors that may be grouped under the headings: economic, monetary and psychological, the latter relating to crowd psychology

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The few people who have been named in this article:

• They does not understand a thing about the stock markets
• They do not want to tell you the truth about stock markets.

Such articles are written mostly by people to justify to themselves why they lost in the stock market, and at the same time, gratify themselves.

Edson Gould was a legend in the investment community.He admitted that he got insight on the market after reading the book "The Crowd " BY Gustave LeBon on crowd psychology..

Gould concluded that stocks sell at the price they do not because of any systematic evaluation of their real worth but rather because of what the mass of investors think they are worth................

the more confident they are the more they will pay ,the more worried they become the less they will pay.

From the book

"The theory of complex phenomena" by F.A. Hayek.

Why is it so difficult to time the market? Because the market is a complex adaptive system and complex adaptive systems are amenable only to what Hayek called pattern predictions. Hayek introduced this concept in his essay The Theory of Complex Phenomena where he analysed economic and other social phenomena as phenomena of organised complexity

In such phenomena, according to Hayek, only pattern predictions are possible about the social structure as a whole: As Hayek explained in an interview with Leo Rosten:

We can build up beautiful theories which would explain everything, if we could fit into the blanks of the formulae the specific information; but we never have all the specific information. Therefore, all we can explain is what I like to call pattern prediction. You can predict what sort of pattern will form itself, but the specific manifestation of it depends on the number of specific data, which you can never completely ascertain. Therefore, in that intermediate field intermediate between the fields where you can ascertain all the data and the fields where you can substitute probabilities for the datayou are very limited in your predictive capacities.

Our capacity of prediction in a scientific sense is very seriously limited. We must put up with this. We can only understand the principle on which things operate, but these explanations of the principle, as I sometimes call them, do not enable us to make specific predictions on what will happen tomorrow.

Hayek was adamant however that theories of pattern prediction were useful and scientific and had empirical significance. The example he drew upon was the Darwinian theory of evolution by natural selection, which provided only predictions as to the patterns one could observe over evolutionary time at levels of analysis above the individual entity.


Hayeks intention with his theory was to debunk the utility of statistics and econometrics in the forecast of macroeconomic outcomes ( his Nobel lecture). The current neoclassical defense against their inability to predict the crisis takes the other extreme position i.e. our theories are right because no one could predict the crisis. This contention explicitly denies the possibility of pattern predictions and is not a valid defense. Any macroeconomic theory should be capable of explaining the patterns of our economic system no more, no less.


One of the key reasons why timing and exact prediction is so difficult is the futility of conventional cause-effect thinking in complex adaptive systems. As Michael Mauboussin observed, Cause and effect thinking is futile, if not dangerous. The underlying causes may be far removed from the effect, both in time and in space and the proximate cause may only be the straw that broke the camels back.


Many excellent examples of pattern prediction can be seen in ecology. For example, the proximate cause of the catastrophic degradation of Jamaicas coral reefs since the 1980s was the mass mortality of the dominant species of urchin (reference). However, the real reason was the progressive loss of diversity due to overfishing since the 1950s.

As CS Holling observed in his analysis of a similar collapse in fisheries in the Great Lakes:

Whatever the specific causes, it is clear that the precondition for the collapse was set by the harvesting of fish, even though during a long period there were no obvious signs of problems. The fishing activity, however, progressively reduced the resilience of the system so that when the inevitable unexpected event occurred, the populations collapsed. If it had not been the lamprey, it would have been something else: a change in climate as part of the normal pattern of fluctuation, a change in the chemical or physical environment, or a change in competitors or predators.


The financial crisis of 2008-2009 can be analysed as the inevitable result of a progressive loss of system resilience. Whether the underlying cause was a buildup of debt, moral hazard or monetary policy errors is a different debate and can only be analysed by looking at the empirical evidence. However, just as is the case in ecology, the inability to predict the time of collapse or even the proximate cause of collapse does not equate to an inability to explain macroeconomic patterns.