How Investor Sentiment Changes and Why It Matters
Stock Market and Cryptocurrency Bubbles 1. Irrational stock market behavior While the stock market is usually driven by rational investing common sense, exceptions do occur from time to time. This is when the overall market or a specific industry creates irrational stock prices at certain times. However, this phenomenon is not a problem in itself, as stock prices are heavily influenced by emotions as well as rational judgment. 2. Clusters and bubbles: centered around cryptocurrency mania However, what we should be concerned about is when this emotional sentiment turns into herd mentality and creates extreme skewness. This is when bubbles are most likely to occur. The cryptocurrency mania of the winter of 2017 is a great example of this: many people took irrational actions in the name of a "new paradigm." The result was a severe bubble, and many people lost a lot of money. 3. Evidence of herd mentality: Analyzing analysts and reactions to articles We often observe extreme reac...