By far, the 2008 Credit Crunch/Lehman crisis required the most trading days for the $VIX to revert back to its mean. For example, the $VIX took nearly double the amount of days to revert to its mean after the Credit Crunch/Lehman crisis than after the October 1987 Crash.

What some may also find interesting is the time it took for the $VIX to mean revert after the Eurozone and Greek Crises. In both instances, the $VIX reverted back to its mean faster than the average of all the crises listed on the chart.

In trading and investing, mean reversion suggests a stock will likely return to its average price if it is currently trading far above or below its average price.  

Behavioral Economists Daniel Kahneman and Amos Tversky have looked into the concept of mean reversion. They were once told by the Israeli Air Force that reward was more effective than punishment when it came to influencing a pilot’s ability to fly. The Air Force came to this conclusion because each time they rewarded a pilot for a great flight, he tended to do worse on his next trial. And when they punished a pilot for a poor flight, he tended to do better on his next trial.

Kahneman and Tversky saw that this was actually a case of mean reversion and that the reward/punishment system was having little impact. Instead, the pilots who flew great were reverting back to their average on the next trial, and the pilots who flew poorly were also reverting to their mean on the next trial. To quote them:

“We normally reinforce others when their behavior is good and punish them when their behavior is bad. By regression alone, therefore, they are most likely to improve after being punished and most likely to deteriorate after being rewarded. Consequently, we are exposed to a lifetime schedule in which we are most often rewarded for punishing others, and punished for rewarding.” (p. 251).

See: The 2013 Credit Suisse Global Return Yearbook via Abnormal Returns

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The principles explained in the video will help make market-related current events more clear to new investors, traders, or passive viewers. For example, The Paradox of Thrift and the 2008/2009 fiscal stimulus packages. And also the Phillips Curve and the Fed’s current mandate to keep interest rates low until unemployment is 6.5% or inflation hits 2.5%.

Here’s a quick a TOC on the six principles, and then the video:

1.) Adam Smith: Free markets and laissez-faire economics work fine, governed by the “invisible hand”.

2.) The Paradox of Thrift: In certain instances, too much savings can make an economy worse off. Queue the Keynes line, “In the long run we are all dead.”

3.) The Phillips Curve: An inverse relationship between inflation and unemployment. When faster growth and employment return, inflation should also rise (and vice versa).

4.) The Principle of Comparative Advantage: David Riccardo on specialization leads to more efficiency in productivity and trade.

5.) The Impossible Trinity: It is not possible to control, all at the same time, exchange rates, interest rates and money flows going in and out of a country.

6.) Rational Choice Theory: Behavioral economics and EMH.

The post Brushing up on Econ 101: Paradox of Thrift, Phillips Curve, Impossible Trinity appeared first on StockTwits U.

“If history counts for anything, the stock market is much more likely than not to advance to a point of real danger.” – Ben Graham

“The explanation cannot be found in any mathematics but has to be found in investor psychology. You can have an extraordinary difference in the price level nearly because, not only speculators but investors themselves, are looking at the situation through rose-colored glasses rather than dark blue glasses.” – Ben Graham

“Ben Graham opened the course by saying, “If you want to make money on Wall Street you must have the proper psychological attitude. No one expresses it better than Spinoza the philosopher. Spinoza said, “You must look at things in the aspect of eternity.” – Marshall Weinberg

“Warren, don’t worry too much about making money. It won’t change the way you live. It’ll change the way our wives live. But look, you and I are wearing the same clothes and eating in the same cafeteria. So relax.” – Ben Graham to Warren Buffett

Student asks Ben Graham: “This question concerns the so called “Wall Street Professional”. Are Wall Street Professionals usually more accurate in their near or long-term market trends, forecasts of stock Market Trends?”

Graham responds: “Well, we’ve been following that interesting question for a generation or more. And I must say frankly our studies indicate that you have your choice of tossing coins or taking the consensus of expert opinion, and the results are just about the same in each case.”

The post The Legacy of Benjamin Graham in Select Quotes and Video appeared first on StockTwits U.

The post Short Sellers and Negative Reinforcement appeared first on StockTwits U.

Here is an example of a chart analog from the Wall Street Bean, who compares the S&P 500 from August 1998 through January 2013 to the S&P 500 from August 1966 through January 1980:

Does This S&P 500 Chart Look Familiar?

As Mark Twain said, “history does not repeat itself, but it does rhyme”…  And from Reminiscences Of A Stock Operator, “Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street.” Both of these quotes, at the heart of the chart analog.

Here is a second chart analog post, this time from Ryknow.  It kicks off with the Déjà vu scene from the Matrix:

[Neo sees a black cat walk by them, and then a similar black cat walk by them just like the first one]
Neo: Whoa. Déjà vu.
[Everyone freezes right in their tracks]
Trinity: What did you just say?

The post A Quick Lesson on Chart Analogs appeared first on StockTwits U.

The second video, from Dan Ariely, is a brief intro to Behavioral Economics made for Duke University. Watch these two sub 5-minute videos and you’ll have a quick understanding of what Behavioral Economics is all about:

The post Stumbling Across Two Videos on Behavioral Economics appeared first on StockTwits U.

1. Phil Pearlman On the Absence of Formal Technical Analysis Education 

    

2. The Reformed Broker on Academia vs Technical Analysis 

    

3. The comment section of TRB’s post (above) has a great discussion; chime in 

    

4. All Star Charts asks, Why Does Technical Analysis Make Some People So Angry? 

    

5. Tom Brakke, The Research Puzzler, on Pattern Recognition
   

The post A Set of Links on the Debate Surrounding Technical Analysis appeared first on StockTwits U.

“It is Anti-Darwinian in America’s corporations. And that means a guy goes to college, and this is the guy who becomes CEO, and he is in college and he is the kind of guy who was the president of the Fraternity. These are the guys I remember who are always at the Fraternity. He is always there even when you have a bad day. Your girlfriend left you, you had a bad test score, or whatever. He’s always there. He buys you a drink, sit around with him, he commiserates with you. Play a little pool. You like the guy, you can’t help but like the guy. You used to wonder, when the did he do any work? But, he was always there for you. He never made many waves; he never said anything too obtrusive. But, he was a good guy.

That same guy goes out into corporate America and politically he is astute. He knows how to get along with people and he never really rocks the boat. He never comes up with any great idea; he’s not a threat to his superior and, as a result, he moves up the ladder because, really, in corporate America, there’s really very little accountability… So, he moves along the ladder and he gets slowly up to the top. Now he has two attributes: he’s politically astute and he’s a survivor–he’s not really a threat and he gets to the top.

These are the attributes of today’s CEOs for the most part, with exceptions. He doesn’t ruffle feathers; he doesn’t get the board upset; and as he moves up the ladder, he finally gets to be number two to the CEO. Now, the CEO has the same attributes–where he doesn’t want to be threatened and he’s a survivor. The CEO will never let anybody be number two who’s smarter than he is. So, by definition, the assistant to the CEO is a little dumber than the CEO. [And the cycle continues.]“

The post Carl Icahn on the thing about Corporate America appeared first on StockTwits U.

Marginal Revolution University is now up and running: http://mruniversity.com/

Harvard and MIT EdX is starting now: https://www.edx.org/courses

This is What Technical Analysis Was Like in the 70′s via @AllStarCharts

Fischer Black’s Noise. “…noise is what makes our observations imperfect…” via @ppearlman

A Neckline Doesn’t Make it a Head and Shoulders via @harmongreg

Economic Recoveries 101 via @ReformedBroker

Introduction to Technical Analysis via Credit Suisse

Brief History of Central Bank Liquidity Swaps via @CVecchioFX

Order flow as a predictor of return via @jackdamn

Volatility Skew via @Teycir

Sir John Templeton – 16 Rules for Investment Success via @ritholtz

Understanding When Cash Is King via @heartcapital

Manager ego, envy and the dangers of emulating the Ivy portfolios via @abnormalreturns

Why Swing Trading works via @sunshinetrader

Ichimoku Kinko Hyo via @Fibline

Last Word on Breadth via @derekhernquist (part 1, part 2)

Renko Mechanical Trading System via @Fibline

Beating the Show-offs via @ReformedBroker

Seasonality: Day of the Month Matters

The post StockTwits U Festival of Links for the Week of October 15 appeared first on StockTwits U.

The @SteenbargerClassics Stream: A Timeless Educational Tool via @SteenbargerClassics 

What Volume Bars Tell You About a Stock via @1nvestor

Bullish Percent Indices via @stockchartscom

Short Selling Using a Quantitative Value Investing Approach via @valuewalk

Trading Candlestick Patterns Properly via @Fibline

Comparing E-minis and ETFs via @CMEGroup 

The post StockTwits U Festival of Links for the Week of October 1 appeared first on StockTwits U.