E-motions: Vol. No. 1, Issue No. 30 Brought to you by California News Tech (OTC BB: CNTE)

By: Tai Nicolopoulos E-Motions Writer 07/12/2006

Slow News Days: Heuristics Run Amok

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1. Emotions in Focus: Emotions in Focus: Restless Investors Get Irrational

    Many traders will tell you that they try to pick stocks based solely on the potential opportunity to profit. There is risk, as well as opportunity cost, inherent to each trade, so all of their picks should be the best ones possible. In reality, however, this may not always be the way that people trade. Everything from cognitive biases to simple boredom can influence traders’ decision making. A variety of factors can exacerbate these decision making errors, but one in particular comes to the forefront during this part of the quarter.

    As the number of earnings statements being released begins to slow down in between peak earnings seasons, traders can sometimes find themselves at a loss for ideas. Especially on a day with only a handful of companies reporting, and little happening on the market overall, traders can start behaving irrationally.

    There are a number of cognitive biases, or heuristics, that can particularly impair traders’ judgment during these points in the market cycle. A low volume of earnings releases can often result in a dearth of trading opportunities. Then traders suddenly face a set of circumstances that vary greatly from the conditions under which they normally make decisions. Not only are there fewer benchmarks against which to measure the advisability of a trade, but also people tend to want an immediate payoff, so they take the few opportunities that are available.

    Psychologists call this first benchmarking effect the anchoring and adjustment heuristic. This heuristic influences the way that people intuitively estimate probabilities, and has been recognized as influencing the way people view fair prices and good deals. Starting with a reference point which is sometimes implicit, such as another stock price in the same sector, people adjust their estimate for a given value from that point. If that anchoring point is skewed somehow, it influences all subsequent estimates people make. In the case of the stock market, for instance, if it is a slow week or many stocks are performing poorly, it can make a stock that does moderately well look stellar by comparison.

    The second major psychological factor during these times in the market cycle is called hyperbolic discounting. This term describes people’s tendency to prefer more immediate payoffs to payoffs of an equal or greater value further in the future. When playing the stock market, for instance, a trader might jump at a lesser opportunity that happens to be available right now, despite the risk and opportunity costs, rather than something similar or better later. When the market is slow and traders run out of ideas and strategies this effect can be particularly strong.

2. The Big Movers and Why

    Are you missing out on potential profits from Heads UpTM recommendations? Last week, MediaSentimentTM subscribers using Heads UpTM for Thumbs Up / Thumbs Down recommendations for publicly traded companies were able to take advantage of these Big Movers, moving 5% or more in their recommended directions, after they released earnings.

Big Movers in the Spot light:

    Recently, two tech companies illustrated the power of heuristics during slow periods in the market cycle. Oracle, Corp. (Nasdaq NM: ORCL), a major enterprise software company, which provides solutions for various tiers of a business, including database, middleware, business intelligence, business applications, went up 5.16% on June 22nd, after a Thumbs Up Heads Up™ recommendation. Meanwhile, DynCorp International, Inc. (NYSE: DCP), which provides outsourced technical services to civilian and military government agencies and commercial customers worldwide, went up 13.31% on June 19th, after a Thumbs Up Heads Up™ recommendation. When DynCorp released earnings there were very few other companies releasing earnings. While providing technology to Afghan military and police forces has created interest in DynCorp for the time being, and it recovered from losses in the previous quarter, its increase in revenue was nothing special at 5.4%. On the other hand, Oracle’s revenues were up 22%. While Oracle’s combination of disparate software divisions has won it its detractors, it still seems illogical that its stock price would go up so much less than a much less profitable and lower-profile company. Nonetheless, DynCorp was the big winner for the week. Part of what made this possible was the fact that Dyn Corp. released earnings before Oracle and other big movers, entering a field with little to use as a benchmark, and impatient traders took the bait.

Other Big Movers:

    FedEx Corporation (NYSE: FDX), which provides transportation, e-commerce, and business services worldwide, went up 5.23% on June 21st, after a Thumbs Up Heads Up™ recommendation.

    All figures reflect all MediaSentiment Heads UpTM recommendations between Monday, June 19, 2006 and Friday, June 23, 2006, rating companies on the day of their quarterly earnings releases correlated with their stock highs and lows for the subsequent day.

3. How to Use the News

    During slow periods of the market cycle it is important to remember that you may view certain stocks more favorably than you would if they were facing stiff competition. People discount role cognitive biases play in their own decision making processes, so it is important to step back a bit before making a trade you suspect might be less than rational.

4. Links you can use

There WILL Be a Quiz: Weekly Markets Recap
The InfoTech 100 Companies: Oracle Profile
DynCorp Posts 4Q Profit: Financial News - Yahoo! Finance

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