How Vulnerable Are You to Mass Hysteria?

We often think of ourselves as being too logical of level-headed to be turned around by some

bizarre social reality. We never bought a hoola hoop. We know Elvis is truly dead.

We all are vulnerable to some extent and we all have our Achilles? heels. If you understand how

these phenomena of heard psychology work, you?ll be better prepared to deal with them.

And, as an options trader, you must be able to see reality for what it is in order to profitably trade

reality. Let?s start with a few examples to illustrate the point.

In London in 1524, the city awaited its doom. Numerous astrologers and fortune tellers had

foretold a massive flood. The great Thames, one of the world?s best behaved rivers, was to jump its bank

and engulf the entire city on February 1. Doom and gloom was predicted by just about anybody anyone

would listen to. Over 20,000 citizens, nearly the entire population, moved to higher ground.

On February 1st nothing happened. But the charlatans had an answer. A minor miscalculation

had occurred. The flood was coming in 1624. Londoners were safe at least for awhile. sound like any

economic forecasters you know?

If you think these things only happened in the middle ages and that only the ?poor dumb masses?

are caught up, think again. The ?red bating? frenzy of McCarthyism even caught up the ACLU. That is a

group who considers themselves above emotionalism. The fact is they too were swept along in the 1050s

and refused to defend suspected communists.

This type of behavior occurs in options trading regularly. Traders get caught in the power of mass

delusion - ?Prices are going through the ceiling!? , ?There?s no end to this bull move!? - that causes them to

lose control of their trading.

Let?s take a quick look at how these fantasies develop. Our personal and collective body of beliefs

can be roughly divided into two distinctly different types. The first is deeply rooted in physical fact. If

wee tough something very hot with our bare hand, we get burned. It is extremely difficult for anyone to get

us to change our minds regarding these beliefs.

When we get into very complicated areas in which we have strong feelings, yet our understanding

is somewhat vague, we tend to rely on others that we consider to be authorities. In the case of religion, it is

ministers or priests. In politics it is politicians. In finance, it is bankers, advisors, etc.

Options trading is no different. It certainly can be complex and vague. We look to professional

traders, journalists, brokers, newsletter writers, etc. When they get caught up in the image of what

?everyone? thinks is happening, they whip traders into a wild frenzy. This pulls the average investor in off

the street. Everyone thinks the market will never stop. Novice option traders get burnt!

You need the discipline that comes with an understanding of the mass psychology that can

overcome even the best traders? common sense. Add to this the courage to stand up to anyone trying to

bully you or dazzle you into a trade. As we discussed earlier, successful traders control their emotions.

Another pitfall traders can encounter is old-fashioned fraud. This can involve classic Ponzi

schemes, falsified research, or a creative presentation of research. For example, a dishonest broker locates

50 or so prospects who will listen to his pitch. He tells them he is backed by an excellent market analyst

who has an incredible system for anticipating the direction of the S & P 500 Index. To demonstrate just

how accurate it is, this pitch man offers to share the research with each of the 50 prospects for the next four

weeks. With each weekly call, the prospects are told whether the system is calling for higher or lower

prices. Half of the group are told higher and the other half lower.

Despite what happens is the S & P, at the end of four weeks, there are at least six people who have

seen four perfect market projections. These six are convinced and could be taken advantage of.

This is only one of the many, many scams perpetrated against would be investors. There tends to

be a common thread among these types of sales presentations, and that is an unbalanced presentation

between the possibility of loss compared to the easy gains that can be made.