Any market is an inherently social institution. A market by definition exists when two people trade something. As such, one cannot fully understand an institution like Wall Street without understanding the sociological and psychological foundations underlying it.
The ways in which financial analysts price assets like bonds are subject to social trends. They are now priced by the state-pricing model. Before that it was the capital-asset pricing model. Before that it was, i dunno, maybe a guy reading pig entrails or something. The point is that there is no reliable objective way to predict the future market value of an asset. "Experts" instead rely upon whatever theoretical foundation is currently the flavor of the week churned out by academia. Once you view financial market participants as a human society, a more accurate picture of how the market works emerges.
In the short run, market prices are explicitly what the society values an asset at. In the short run this has nothing to do with any fundamental value behind an asset, but rather what the society collectively values it at. All of those graphs tracking an asset's price over time are literally graphs tracking the equilibrium price at which the society values that security. As such, all of these prices are subject to human societal and cognitive biases. Socially, things like crowd psychology run rampant. Consider the recent string of IPO's by social tech companies. Ignoring the fact that the companies had little to no actual revenue streams, the trading society's conscience collective was ignited by the story of Mark Zuckerberg and the promise of riches from those companies. And how have they fared since their IPOs? At the time of this writing, Facebook (FB) has dropped from $45 to $21, Groupon (GRPN) dropped from $31 to $4, and Zynga (ZNGA) dropped from $10 to $2. I think LinkedIn (LNKD) is a bubble waiting to pop with a price to earnings ratio of over 900! This societal stampede towards easy riches can be seen in any market bubble.
Wall Street itself is set up in a manner that encourages a herd-like mentality of traders. People like professional analysts, Warren Buffet, Jim Cramer, etc. are all presumed to have knowledge that the layperson does not. As a result, the vast majority of market participants herd towards any stock they recommend, while they stampede away from any they don't. Similarly, beginning level traders are often expected to conform to the views and beliefs of their superiors. How else would they hope for promotion?
It's also interesting to see how the social market bubble also applies to other areas of finance like Venture Capital. I'm an aspiring entrepreneur, so I've done a lot of internet research on business opportunities. Every "Hot Start-Up" list for the past 5 years lists App company after App company, Social this and Social that. Venture Capitalists giving these entrepreneurs their funding are just as subject to societal movements as Wall Street Traders are. Which one of them wouldn't want to be the next Peter Thiel (an early investor in Facebook)?
Psychological effects are also important to note. Since they are in every human, they are bound to effect social markets on a large scale. There is a whole industry dedicated to predicting future stock prices based on past performance called technical analysis which relies heavily on analyzing stock charts. They talk a lot about moving averages and support levels. I think those are great examples of the anchoring and adjustment heuristic. Other things, like our tendency towards risk aversion, and hindsight bias also play important roles in how people trade.
Another interesting aspect of all of this is how regardless of irrationality, how we socially define reality essentially is reality on Wall Street. For example, it ultimately doesn't matter that technical analysis is ultimately a pseudoscience quackery. If enough people believed in it, the markets would behave exactly as the chartists predict because in this case the chartists are the market. I don't remember who said it or the exact phrasing, but a phrase I like goes something like this. Irregardless of reality, a thing is real if it is real in it's effects. God doesn't exist, but he has still influenced a couple thousand years of human history.
Now the question is, how do we make money from this? There are 4 ways to make money on Wall Street. 1- Cheat. Make a Ponzi Scheme, trade on insider knowledge, etc. 2- Get REALLY REALLY lucky (unlikely). 3- Invest in a passively managed index fund. This is a great strategy advocated by those of the efficient market hypothesis which you can read up on your own if you want to. It is, however, kind of boring. 4- Value investing. Buying stocks that have a high book to market ratio. This is usually pretty hard to stomach however, as it means betting against the prevailing wisdom/social forces on Wall Street. This is what Warren Buffet advocates.
Oh I almost forgot a fifth way. Make money selling your own bullshit advice (*cough* Motley Fool *cough* Jim Cramer *cough*). On that note, you should really look into buying some Tesla Motors Stock.
(Disclaimer: I am long Tesla. But you should really, really buy some too.)
