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Arbitrary But True: Hidden Influences On The Stock Market

03/10/04 01:36:49 PM PST
by James Maccaro

However exhaustive your research, there are forces at work that you may not expect.

As investors, we can be subject to arbitrary influences in the markets, whether they come from investors' actions or other uncontrolled forces. For this article, I have identified four stock market factors that can be characterized as arbitrary in that they reflect impulses or powers without a direct connection to investment decisions, but which nevertheless can affect investment outcomes.


Apparent arbitrariness can be introduced into the market because of human psychology. For example, confirmation bias is the concept in psychology that refers to the tendency of people to seek information that confirms a preconceived judgment and to ignore contrary facts. This can be disastrous when applied to the stock market, where success depends on a clearheaded analysis of the facts.

Once you buy a stock, there is an inclination to give great weight to any data that supports your decision and to ignore negative findings. This tendency must be guarded against.

The Internet can exacerbate confirmation bias, because sometimes the information available is one-sided. For instance, I purchased a medical technology stock a few years ago and was reassured by a constant stream of medical journal articles and medical conference presentations that praised the technology. I knew about these positive findings because they were highlighted by company press releases, which were placed on the Internet and therefore appeared on Yahoo! and other Internet search services.

For many months after I purchased the stock, I was largely unaware of the many negative medical journal articles and medical conference presentations because these were not widely reported and were, of course, ignored by the company's investor relations department. As no one had a financial interest in publicizing bad news about the company, negative findings rarely were posted to the Internet.

After several years, I ended up breaking even on the investment, as the company was taken over by a much bigger competitor at a price very close to my average purchase price. If I had been more alert, I might have bailed out earlier and gotten a better return.


Weather can play an apparently arbitrary role in stock market sentiment. Professor Edward Saunders of Vanderbilt University published a study in 1993 that showed a correlation between stock market declines and unseasonably bad weather in the Wall Street area. Likewise, in 2001, professors David Hirshleifer and Tyler Shumway of Ohio State University concluded, based on a study of the weather in 26 cities with stock exchanges, that the market is more likely to increase on sunny days.

Other studies, however, have downplayed, and some have denied, a connection between the weather and stock prices. I would also think that stock prices would tend to do worse during the winter if this theory were airtight, but this is not the case.

Although the evidence is not clear about the weather's impact on stock prices, it is a given that weather affects mood. When we are in a "sunny" mood, we are likely to be more positive about the future. This suggests that an unconscious bias could exist for some individuals toward stock purchases on days with good weather.


Simple dishonesty can introduce an arbitrary element into the market. For example, marking the close is a term used in the mutual fund industry that refers to buying a stock shortly before the close of trading in order to temporarily increase the stock price. Mutual funds have been known to engage in this illegal practice on the last trading day of a quarter in order to artificially inflate reported quarterly results.

Mark Carhart of Goldman Sachs Asset Management conducted a study in 2003 that found that at least two-thirds of equity mutual funds beat the results of the Standard & Poor's 500 on the last trading day of each quarter; less than half beat the S&P the rest of the time. This strongly corroborates the belief held by many experienced market watchers that some mutual funds engage in marking the close in order to boost reported quarterly results and that, as a general rule, investors should not buy an equity mutual fund on the last trading day of a quarter.


Some seemingly arbitrary factors are harder to explain, such as what I refer to as "The Donald" syndrome.

The success of real estate mogul Donald Trump's television program The Apprentice has led several market watchers to notice that in the past the peak of Trump's public profile has coincided with the crest of the then-prevalent bull market.

Trump's fame reached new heights in 1990, when he published a best-selling book (Trump: Surviving At The Top) and launched a massive casino in Atlantic City (The Trump Taj Mahal). He also had control of an airline (Trump Air) and a department store chain (New York City's venerable Alexander's). This presaged by a few months a turning point in the market, as the economy declined and the stock market slid. The casino declared bankruptcy (although Trump managed to retain control), the airline and department store closed, and Trump himself nearly had to declare personal bankruptcy.

Now he is back, and some see it as a sign that the market has peaked. Stephanie Pomboy, author of the MacroMavens newsletter for institutional investors, takes it one step further and recently argued that Trump's increased repute signifies that "we are making heroes out of debtors." Her assertion is that this indicates we are nearly at the top of a "credit boom" that will be followed by constricted credit, which always has a negative effect on the stock market.

I enjoy watching The Apprentice, but it also reminds me to watch out for arbitrary influences when it comes to the stock market.

James Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, the Massachusetts Law Review, and other magazines. He can be reached at

Current and past articles from Working Money, The Investors' Magazine, can be found at

James Maccaro

James Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, The Massachusetts Law Review, and other magazines. His law journal articles have been cited in several legal decisions, including by the US Court of Appeals for the DC Circuit and by the US Supreme Court. James A. Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, The Massachusetts Law Review, and other magazines. His law journal articles have been cited in several legal decisions, including by the US Court of Appeals for the DC Circuit and by the US Supreme Court. He may be reached at

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