STREET DOGS
MICHEL PIREU: Investor sentiment’s hidden hand
FROM a paper by Malcolm Baker and Jeffrey Wurgler: The history of the stock market is full of events striking enough to earn their own names: the Great Crash of 1929, the Go-Go Years of the 1960s, the Black Monday Crash of October 1987, and the Internet or Dot.com Bubble of the 1990s. Each of these events refers to a dramatic level or change in stock prices that seems to defy explanation. The standard finance model, in which unemotional investors always force capital market prices to equal the rational present value of expected future cash flows, has great difficulty fitting these patterns. Researchers in behavioural finance have been working to augment the standard model with an alternative built on two basic assumptions.
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