A swingin’ Gestalt theory to rock your stocks

By Forex Zone
September 21, 2016

The early 20th-century Gestalt psychologists developed some theories on perception that we find pertinent in explaining why vivid events tend to create a frame of reference.

They noticed that people organize complex visual fields into coherent wholes, or gestalts, rather than seeing unrelated elements in isolation. And when organizing a gestalt, people like a focus. Recall the famous picture of the vase set off by profiles — impossible to see both at one time.

The Gestaltists came up with a series of laws to describe how people arrive at perceptions, some directly applicable to the stock market:

The law of proximity. Elements close to one another in space or time will be perceived as groups. Market application: Investors paint an entire picture out of a few anecdotes and switch systems accordingly, thereby continually cheating themselves of the opportunity to get an edge and make a profit.

The law of continuity. A string of items will indicate where the next item in the string will be found. Market application: A string of declines, a string of earnings warnings or a series of rallies gather momentum.

The common fate principle. Items that move or change together will be seen as whole. Market application: Companies in an industry tend to suffer or benefit from the miseries or good fortunes of the outliers.

The law of closure. Parts of a figure that are not presented will be filled in by the perceptual system. Market application: Need we say more?

Even as the price-to-earnings ratios of many tech stocks approach that of value stocks, our readers are not likely to take advantage of the fact that it is darkest before the dawn, or heed our prediction that there should be a spectacular rally in the markets starting by the end of December. So we turn instead to an application of Gestalt psychology: the importance of round numbers.

Round numbers — 100, 5,000, 10,000 — have a tendency to attract attention, orders and trades. Thus, the common effort to price items at $9.90 rather than $10.00, and the tendency of your friendly gas attendants, in the rural areas where they still exist, to top out your gas to exactly $10 or $20.

 

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