amine, and the advice that stems from them, comes from a radically different paradigm than efficient markets, or for that matter conventional Wall Street thinking. In many ways, it is as different as Copernicus from Ptolemy.

What then do these other methods lack? On paper, at least, they have a high probability of success. The key principle of this book is that people are not the rational, omniscient decision-makers that the efficient market believers claim, and most investment practitioners believe. Rather, we are constantly pushed or pulled by psychological influences.

To be fair, it is not only these groups who do not understand investor psychology and make major mistakes as a result.

All of us are affected by these powerful but unrecognized influences.

All of us have heard of how investor psychology has tumed positive or negative on an industry or company, or on the market as a whole.

All experienced investors have no doubt pondered the extreme psychological variarions that markets display over time.

The problem we face is that, although we know much of the cause of success or failure lies largely within the realm of psychology, we really do not understand how and where psychology meshes with investment decisions. As a result, we make costly and sometimes disastrous errors time and again. Leaming the principles underlying investment behavior will allow us to develop successful market strategies. The methods have worked well over long periods and should continue to succeed, because they are based on predictable pattems of investor behavior. These are the odds available in the green wing.

The psychology of market success that Ill describe is anything but "will-o-the-wisp." Its bedrock is consistent and predictable investor errors in the marketplace. This bedrock will support a new theory of markets and investing. As you will see, the assumptions underlying the methods are well documented, both empirically and psychologically. At every stage of the development of our new strategies, Ill demonstrate the strong statistical proof the probabilities are built upon.

What we will see is that not only do investors go wrong, they go wrong in a systematic and predictable manner. So predictable, in fact, that consistent investment strategies can be built on their mistakes. More than that we can calculate odds on how well our strategies will work over varying periods, in a similar manner to the gambling casino. These strategies, as Ill demonstrate, have worked for generations, and I suspect since the dawn of markets. That is, if human behavior hasnt changed.

How and why these probabilities work is what this book is about. In examining them we will go far beyond markets, to some seemingly uni-

The Journey Ahead

The joumey will be wide-ranging both in time and breadth. We will examine markets, psychology, finance, economics, statistics, even politics. Part of the text will naturally be somber, but it will have its lighter moments. I wrote in Psychology and the Stock Market over twenty years ago that "the integration of financial and psychological understanding is a new and basically uncharted field." To my amazement, the whole new field of behavioral finance has spmng up since. Psychologists, economists, and investment academics are now beginning to study markets and are finding anything but rational behavior. Their major new research can be of profound benefit to you. Once you understand the principles, there is nothing magical or mysterious about the work.

To retum to that great probability player of warfare again, Napoleon once asked, "Is it because they are lucky that [great men] become great? No, but being great they have been able to master luck."

While no book can teach you how to make a "great" fortune, I believe this one can give you a much better chance of mastering your luck in markets. Once you see the odds, all you need is an open mind and the courage of your convictions. I am convinced that today the individual investor has an exceptional opportunity to beat both the market and the experts. If you are a serious investor, I think our joumey will prove rewarding.

versal laws of human behavior. People encountering the same situation will act the same, within the marketplace or outside of it. Our new investment approach stands on market history, on the latest psychological research, and on thorough statistical analysis.

I hope to demonstrate that we can hamess psychology and use it systematically to attain our investment goals. But before we attempt it, we must understand just how powerful these forces are, and why they lead most of us into the red rather than the green rooms. This is the reason why most investors, including the experts, unde erform the market averages over time.

From Technical Analysis to Astrology

The Walls Come Tumbling Down

Investing today is not a little like politics in the former Eastern Bloc. The poverty, the corruption, the misery finally overwhelmed the shaky old edifice-in Poland, in East Germany, in the Soviet Union itself. The citizens rejoiced, and the world rejoiced with them. But the reformers could not deliver the progress they had promised. The situation continued to deteriorate. The world went about its business. Then a strange thing happened. The citizens began voting communist bureaucrats back into power. The slogans were different, but the people were the same. Aleksander Kwasniewski, a former communist official, was elected President of Poland over Lech Walesa, one of the activists who had brought the old system down.

Likewise on Wall Street, a new, supposedly scientific approach attacked the methods of generations. Young activists called the old ways bankrupt and undertook to eradicate them. The new science spilled out of academe and welled up on Wall Street. But then, with the battle seemingly won, it too came under withering fire.

Neither school fulfilled its promise-a system that could beat the market.

Like communist bureaucrats, bereft of viable ideas, many Wall Streeters have blended the new theory with the old, creating a muddle similar to the chaos in Eastern Europe. To sidestep the morass, we will look at old and new alike to find out why they cannot achieve the results they promise.

This chapter and the next will examine the investment methods experts have followed for generations. Many investors still believe that