Couple of chart that appeal to me. By: Optimal Portfolios

Cialdini's book Influence: The Psychology of Persuasion listed six human behavioral tendencies that defies rationality.

The six tendencies and my interpretations are:

Reciprocation - We want to give something back when we received a favor. Investment implication: We tend to loose up our discipline after a big gain.

Commitment and Consistency - We hate to change our decision or believe once we are committed, especially when we make the commitment public. Investment implication: We tend to commit to a winning stock and refuse to change our commitment.

Social Validation - We tend to follow what the majority of the crowd do. Investment implication: We want to follow tips, buzz, hot picks by professionals, etc.

Liking - We tend to say Yes to the people we like. Investment implication: We tend to buy the stock we like without doing adequate research.

Authority - We tend to follow orders from higher authority even if the order is obviously wrong and ridiculous. Investment implication: We tend to follow analysts' recommendations.

Scarcity - We find scarce things more attractive. Investment implication: We tend to believe scarce information. By: Optimal Portfolios

In both of my finance and economics class, professors argue that the stock market is efficient at least in a "Semi-Strong" form. This means that all publicly available information is fully reflected in the current stock price, making future performance totally random.

In plain words, both techincal and fundamental information are useless in predicting future stock prices.

After some reading on the "efficient market hypothesis", it appears that one of its main arguements is the existence of arbitragers would eliminate any inefficiencies.

Now let's pause a moment and think about it ...

Arbitragers keeps the market efficient ...
Arbitragers makes money from the inefficiencies ...

Conclusion:

If the market is indeed efficient, arbitragers would starve because their efforts would yield no profit. The fact that there are arbitragers means the market must be inefficient.

So what is reality?

I believe the efficiency of the market and the number of arbitragers are in an evolutionary equilibrium. When the market is more efficient than the equilibrium, arbitrage opportunities would decrease, causing the population of arbitragers to shrink. The decline in arbitrager population will decrease the efficiency of the market, bring it back to balance. By: Optimal Portfolios