HERD INSTINCTS

"At Yale, I kept signing up for mass psychology courses," Prechter said.  "I never made the connection between that and speculative finance until years later when I realized “that they are the same field.”

Pointing to research on the limbic system, the more primitive area of the brain that relates to survival and fear, Prechter observed that these "impulsive, not rational actions help organisms survive in primitive circumstances.

“Organisms flock or herd together in a group. If you are in a group, your odds are better for survival. If one animal is running, others tend to follow even if they don’t know why that first animal is running. It's not rational thinking, but it's not completely random, either.”

Unfortunately, such impulsive behavior does not enhance survival in all modern circumstances. Drawing an analogy to stock investors, he says, "This thinking is impulsive and patterned. The tape is nothing but the herd.  As investors see prices race up and down, they jump in and out. That is the origin of waves--the patterns in which humans herd.”

“The stock market is a direct recording of social mood. It moves up and down as people change their collective thinking. The social mood has been expansive for the past decade and has resulted in an expansive economy.

“During a mood expansion, people buy stocks, expand their businesses and take more risks. Optimism and ebullience cause like behaviors in all other fields as well, which is why social and financial trends correlate."

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