Here is a good excerpt from
Markets In Profile following up on Pivotprofilers comment regarding the quick and the dead.
"Imagine you're at the track.... you make your wager before the race starts and settle in to watch the horse run. What if we changed the rules and let you place your bet after the race is already under way?
A totally different side of human psychology would be revealed. Once again, all information must be placed within its proper context - how will your decision be affected if the horse you had planned to bet on is currently in the lead? What is the horse is losing momentum around the second turn? How will your betting habits be affected by this real-time information?
We should expect, considering a general understanding of human nature, that the larger the horse's lead, the more individuals will place bets on that horse to win, and that bets on the horse in the back of the pack will evaporate. When you extrapolate this behavior in the context of financial markets, is it really so "irrational"? When you think about it, betting on a clear winner is a pretty rational decision, in the immediacy of the moment. This phenomenon is commonly known as "
momentum investing," which is often the primary force behind short-term market movements. And just as the payoff odds decrease in betting a pool more money is placed upon a particular entry, the payoff odds decrease for late-momentum investors as the market explores extremes.
"
- From
Markets In Profile -