S&P 500 rose 0.82% today and it seemed that participants were somewhat bullish. But why was that?
Was it because market participants (or some of them) knew something or was it because they thought they knew something?
The reason I’m bringing this up is because I’m reading this book by one of my professors and his colleague titled “Pitch the Perfect Investment” that, among other things, talks about few topics in behavioral finance.
The authors, based on available research, demonstrate that a diverse group (such as a market) makes better predictions and has better information compared to a small group of experts when it comes to investment decisions. In other words, diversity improves the decision-making quality.
However, if participants don’t make independent decisions and are influenced, emotionally, by the actions of others in the market, they will be biased in their decision. And unfortunately this bias can’t be offset by the positive impact of diversity.
[Lack of independence]…can’t be offset by the positive impact of diversity.
So, going back to the S&P 500 move today, was market right or was it biased? It’s hard to say and frankly, the only way we can find out is doing more due diligence and even that might not work.
So, maybe we shouldn’t try to figure out what motivates the market behavior or try to predict it?
