Affiliations: [a] Department of Mathematics, Unversidad de los Andes, Bogotá, Colombia | [b] CNRS, Institut Non Linéaire de Nice, Sophia Antipolis, France | [c] Laboratoire J.-A. Dieudonné, Université de Nice-Sophia Antipolis, Parc Valrose, France | [d] Department of Psychology, Warsaw University, Warsaw, Poland
Abstract: Human decision making by professionals trading daily in the stock market can be a daunting task. It includes decisions on whether to keep on investing or to exit from a market subject to huge price swings, and also how to price in news or rumors attributed to a specific stock. The question then arises how professional traders, who specialize in daily buying and selling large amounts of a given stock, know how to properly price a given stock on a given day. Here we introduce the idea that people use heuristics, or “rules of thumb”, in terms of “yard sticks” from the performance of the other stocks in a stock index. The under or over performance with respect to such a yard stick then signifies a general negative or positive sentiment of the market participants towards a given stock. Using empirical data of the Dow Jones Industrial Average, stocks are shown to have daily performances with a clear tendency to cluster around the measures introduced by the yard sticks. We illustrate how sentiments, most likely due to insider information, can influence the performance of a given stock over period of months, and in one case years.
