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May 31, 2004

A Wee Bit of Touchy Feely

By Gregory Bresiger

Also in this article

  • A Wee Bit of Touchy Feely
  • Page 2

Behavorial Trading

Methods for Measuring Investor Confidence, Expectations, and Market Trends

by Woody Dorsey

(Thomson Texere, $69.95, 247 pages)

How do you feel today? And how do others on the desk feel? And how do

your clients feel? These can be serious questions for trading professionals. Listen carefully for the answers, vital market information could be escaping if one doesn't pay attention.

A financial professional's psyche, his or her inner feelings, can be as important as any economic measurement. That is one of the themes of this interesting book, which was published by a unit of Thomson. The latter is the parent of Traders Magazine. There's more to markets than numbers - there are human beings who often follow herds.

One can measure p/e, bids, spreads and myriad other things, but can one measure confidence? Woody Dorsey, a market commentator with his own business and the originator of the Triunity Theory of Markets, argues that it is worth the effort. In this behavioral economics text, he contends that the confidence part of markets is an often-overlooked element. Dorsey calls in former Treasury Secretary Robert Rubin to make the case.

"But everything I have experienced suggests that, at core, economic conditions and markets are grounded in the human psyche," Rubin says. "That is, confidence, or the lack thereof, profoundly affects markets and economies, and confidence in turn, has throughout the history of markets and economies tended to swing from excesses in one direction to excesses in the other." (page 8).

In other words, markets are not always rational because human beings often are irrational. From this, Dorsey begins to assemble his brief against the idea of efficient markets; the idea that markets are always right. Dorsey says that is wrong. George Soros, another market heavyweight cited by the author, goes one better.

"I believe that market prices are always wrong in the sense that they present a biased view of the future. But distortion works in both directions: not only do market participants operate with a bias, but their bias can also influence the course of events that are shaped by present expectations. The participants' perception are inherently flawed." (page 10).

So Dorsey proceeds to make a know thyself case for mastering the risks of markets. And he warns of ignoring the behavioral aspects of markets. He cautions professionals and investors that they can be their own worse enemies. For example, he says that one must be wary of one's own "emotional responses" and "automatic thoughts."