I am reading the book 'Irrational Exuberance' by Robert J. Shiller, and come across this interesting term 'Nonconsequentialist Reasoning', originated by psychologists Shafir and Tversky. I quoted the description here, people cannot decide until the events actually occur.
I believe this psychological effect is experienced by many investors. In fact, in my blog, I have recorded at 2 such events.
One was when FSL reduced its distribution, and the price held up for several days before going south. The investors could not decide until they see the next distribution in sight is reduced. On the other hand, when Rickmers cut its distribution immediately, you see that the price went south immediately.
The other one is on Chartered Semiconductor. With the latest player Globalfoundries into the competition space, bloodbathing is logically expected. But the investors seems like cannot decide what to do, they may want to wait till they see blood.
On a bigger picture, I think this also explains why Technical Analysis is working in many cases. If market is efficient, and any information is digested immediately and fully reflected on the price, there is no way TA will work.
So, as an investor, we must remind ourselves to make rational decision ... timely.
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