Interpreting Data from an Experiment on Irrational Exuberance, Part B: Reflections from Three Different Angles

Journal of Technical Analysis, No. 62, Summer/Fall 2004

10 Pages Posted: 16 Aug 2005

See all articles by Walter Baets

Walter Baets

Euromed Marseille Ecole de Management

Bernard Paranque

Retired

Henry O. Pruden

Golden Gate University, Ageno School of Business (deceased)

Abstract

The behavioral finance model for structuring the data of the experiment was the Cusp Catastrophe Model of non-linear behavior. The nominal model, based upon the data exposed by the positive model, was a group of four technical market analysis principles and one mental discipline/trading strategy discipline.

This article, the Part B article of the series, seeks to extend the interpretations of the findings. But rather than the single tightly structured theme of Part A, this time the Part B calls upon the varied talents of all three co-authors.

This article takes advantage of the international, cross-cultural and multiple disciplines represented by the three authors. Hence, each of the three co-authors was asked to analyze and re-interpret the experimental evidence from his particular professional discipline. Thus, the three co-authors reflect interpretations from three different angles. The first subsection of this article by Walter Baets reflects his area of discipline, which is complexity and knowledge management. Dr. Baets reflected upon the behavior that gave rise to the price behavior generated by the experiment. Dr. Baets provides a broad perspective upon behavioral finance notions and he gives a penetrating look into the structure behind the actions of the student traders in the Cal Tech Experiment. Dr. Baets considers SWARM-like theories to explain the emergent behavior generated by the individualistic, selfserving behavior of interacting agents, the students in the experiment.

The second sub-section by Professor Bernard Paranque reflects his formation as a doctor of economics and his responsibilities as Head Finance and Information Department. Dr. Paranque sets forth reflections upon the experiment described in Part A that touch upon the sensitive and vital but often unexamined issue of risk and welfare and for all market participants. This viewpoint stands opposite to the self-serving behavior of the few elite traders who could have exploited the cusp and profited from the decline using technical analysis tools. In other words, Dr. Paranque takes up the challenge of examining the ethical dimension of behavioral finance and technical market analysis. His point of departure is the greater fool theory operating during the experiment.

Pruden takes a pragmatic yet artistic approach to the extraction of more information from the technical analysis rules that were used to interpret the laboratory data. And that could have been used by the astute, elite trader to exit the market in advance of the crash in prices. The third section by Pruden reflects upon the four technical rules of principles that were applied in the Part A article. Pruden in Part B seeks to extend the analytical capacity each of the four technical rules or principles by carrying them into the realm of Sequential Art. These were the tools that could have been employed by the astute, elite trader to identify the cusp in time to avoid the catastrophic crash. His goal is to offer ideas and techniques for extracting even more information from the data found in the laboratory experiment.

Extensions stimulated by notions from Sequential Art 1may offer value added to technical analysts in general.

Keywords: Evaluation, social welfare, autopoetic system, learning, coordination, Chart Analysis as Sequential Art

JEL Classification: C53, C6, D6, E44, G14

Suggested Citation

Baets, Walter and Paranque, Bernard and Pruden, Henry O., Interpreting Data from an Experiment on Irrational Exuberance, Part B: Reflections from Three Different Angles. Journal of Technical Analysis, No. 62, Summer/Fall 2004, Available at SSRN: https://ssrn.com/abstract=775344

Walter Baets

Euromed Marseille Ecole de Management ( email )

Domaine de Luminy
BP 921 13288 Marseille Cedex 9, 13288
France

Henry O. Pruden

Golden Gate University, Ageno School of Business (deceased)

United States

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