The Psychology of the Stock Market
J. C. Selden, 1912
Why does the crowd buy at the very top and sell at the very bottom? In 1912 the statistician and financial journalist J. C. Selden wrote one of the first books on market psychology and showed that prices move not only on facts but also on people's hopes, fears and suspicions. You will learn how your own position quietly replaces judgment, and what Selden advises in order to keep a clear head.
Who it is for
For people who make decisions where something is at stake, and who notice that their arguments always seem to line up in favour of what they want.
Many people seem to think that logic was given to us in order to support our desires.
A café where everyone outwitted each other
New York, the start of the last century, a café next to the stock exchange. One professional trader tells another that he has decided to cover. He sold shares he did not own, betting on buying them back more cheaply: that is short selling. He is closing the trade because, he says, there is too much crowding on that side: it seems everyone is short.
The second man replies that everyone reasons in exactly the same way. Each one covered because he thought the others were selling. And the market has barely risen, so there are no sellers left, and a new fall will soon come. The first objects: everyone says that, and they have all sold again, because they thought the others had covered. Selden remarks that these clever mental acrobats could turn somersaults like this forever and never find a place to stop.
J. C. Selden was a statistician and financial journalist, and he published this book in 1912. He was sure that short and medium price movements depend heavily on the mood of those in the market. He asked two questions: how the mood of the crowd moves prices, and how one person's own hopes and fears, timidity and stubbornness get in his way.
This is a market a century old, and the observations of one author, not a study and not financial advice. But his second question applies to any decision where something is at stake: a job, a purchase, a dispute. When it comes to everyday life, this is an application of his ideas, not his advice. Let's start with how the crowd comes to the market, time after time, at the worst possible moment.
Why the crowd buys at the very top
Selden describes a cycle that repeats year after year. First comes a lull: prices barely move, and the public does not care. Then they creep up, and everyone takes this for a temporary thing. The public waits for a reaction in order to buy cheaper, but the reaction does not come, and when it finally does, the market looks too weak to buy.
Those who sold short hold on for as long as they can. But their nerves cannot take the daily blows, and they cover everything at any price, relieved that the loss is no bigger. Here the public decides that the market is too strong to fall, and buys without looking at the price. Meanwhile the large holders and calm investors sell their shares to it. Then the market dips, everyone calls it a healthy reaction, and Selden asks with irony: healthy for whom? The fall comes faster than the rise and ends in a new lull.
Selden sums it up: this is a story of hopes and fears. People judge the market by their own position in it, not by a sober assessment, and they carry what they see today into an unknown future.
There is also simple arithmetic. Opinion in the market is measured in dollars, not in people. One man with a million weighs twice as much as five hundred people with a thousand each. The man with a million stays silent; money speaks for him. A thousand small players are talkative, and among them are those who write about the market. That is why the loud majority inevitably buys at the top: someone had to sell them those shares.
This is like guests arriving at a party just as the hosts are clearing the table. This is Livria's image, not the author's. When you feel like joining because everyone is already there, it helps to ask who is standing on the other side of the deal.
About the author
J. C. Selden was an American statistician and financial journalist. He worked at Columbia University and on The Magazine of Wall Street. He wrote about trade cycles and about what drives the market.
All books by this author: J. C. Selden
Terms from the book
- Smith
- Morgan
- dividend
- Jones
- short selling
- Rockefeller
- discounting
- cover: Close a short position: buy back the shares that were sold without owning them, and return them. If the price has risen, this loses money.
- reaction: A temporary drop in price in the middle of a general rise.
- Hardy: Arthur Sherburne Hardy, an American diplomat, formerly a professor of mathematics and the author of books on quaternions and differential calculus.
- Bryan: William Jennings Bryan (1860-1925), an American politician, three times nominated for president by the Democratic Party: in 1896, 1900 and 1908, and lost all three times.
- Talleyrand: Charles Maurice de Talleyrand (1754-1838), a French diplomat and foreign minister, known for his sharp remarks.
- Bradstreet: An American business information agency. Selden takes from its data an index of commodity prices, which shows how everything was getting dearer.
- scale orders: A translation of Selden's term scale orders: orders placed in advance to buy at each fall of a set step in price, or to sell at each rise.
All terms
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