STREET DOGS

In 1688, Joseph de la Vega, a successful Dutch merchant, wrote Confusion De Confusiones, one of the earliest known books on stock trading.

In the book, Vega vividly describes excessive trading, overreaction, underreaction and the disposition effect.

He also alludes to how rising prices alone create demand and continued price increases.

He writes: “When a bull enters such a coffee house during the Exchange hours, he is asked the price of the shares by the people present.

“He adds 1%-2% to the price of the day and he produces a notebook in which he pretends to put down orders.

“The desire to buy shares increases; and this enhances also the apprehension that there may be a further rise.”

De la Vega reports on how bulls can continue buying and bears can continue selling when there is no reason or cause for them to do so, other than the price action itself: “The fall of prices need not have a limit, and there are also unlimited possibilities for the rise….

“Therefore the excessively high values need not alarm you … there will always be buyers who will free you from anxiety … the bulls are optimistic with joy over the state of business affairs, which is steadily favourable to them; and their attitude is so full of [unthinking] confidence that even less favourable news does not impress them and causes no anxiety…. [It seems] incompatible with philosophy that bears should sell after the reason for their sales has ceased to exist, since the philosophers teach that when the cause ceases, the effect ceases also.

“But if the bears obstinately go on selling, there is an effect even after the cause had disappeared.”

Which goes to show that prices changing without good reason — independent of fundamentals — are nothing new.