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The Mob At The Gate

Friday, 17 Oct 2008 | 6:58 PM ET

Conventional wisdom suggests that the free market knows all. Academics contend that when millions of buyers and sellers agree then, the price is right.

But in recent days investing in stocks has felt like something of a game show; just an elaborate game of chance minus the short explanation from Bob Barker.

It's A Mad, Mad, Market

In the first 10 days of October alone, the Dow lost more than a fifth of its value. The erratic, wild swings in stock prices since then have left many investors wondering if we’re witnessing an efficient market or just the madness of crowds.

"Anyone who thinks American business is worth $8 trillion dollars less than it was last October ought to have their head examined," says Vanguard Group founder Jack Bogle.

Last Friday, the Dow traded in a range of 1,000 points. Much like Bogle, we also think it seems nearly impossible that the value of American business actually fluctuated by that much in a single day.

This week alone, we've seen the Dow's biggest single-day point gain and its second biggest point plunge...ever.

In an insane world how can we ever find sanity on Wall Street?

Market's Mob Mentality
Discussing the market's mood swings, with the Fast Money crew and Dan Ariely, Duke Fuqua School of Business behavioral economist.

“There’s a lot of irrational behavior but what I think is applicable to Wall Street now is the lack of trust and the (resulting) feeling of revenge,” says Dan Ariely, behavioral economist at Duke Fuqua School Of Business. (He’s one of the foremost experts in behavioral economics.)

“When we experience betrayal we want to seek revenge. It’s a very primary motivation of behavior,” he adds. “And we’re willing to lose money to make those people who betrayed us lose more money.”

As you might guess Ariely doesn’t think the problem can be solved with government intervention.

“Unless we fix the betrayal of trust we won’t be dealing with the fundamental problem. I expect to see a long slow bleeding until we fix the trust issue.”

If you’re interested in hearing more check out Dan Ariely’s book “Predictably Irrational.”


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Trader disclosure: On Oct. 17, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Karabell Owns (AAPL), (CSCO), (GOOG), (JPM), (MS), (SLB); Finerman Owns (GS); Finerman's Firm Owns (MSFT), (NOV), (UNH), (DVN), (WLP); Finerman's Firm Owns (DNA_ Call Spreads: Finerman's Firm Is Short (IYR), (IJR), (MDY), (IWM), (SPY), (USO), (BBT), (COF); Najarian Owns (AAPL) And (AAPL) Call Spread; Najarian Owns (AMD) Puts; Najarian Owns (CHK) And Is Short (CHK) Calls; Najarian Owns (HAL) And Is Short (HAL) Calls; Najarian Owns (MS) And Is Short (MS) Calls; Najarian Owns (YHOO) Calls; Najarian Owns (MGM) And Is Short (MGM) Calls ; Najarian Owns (UNG); Terranova Owns (AAPL), (EXM), (FCX), (FTO), (MA), (NOV), (POT), (X), (VLO)

GE Is The Parent Company Of CNBC

Terranova Is Co-Portfolio Manager Of The Virtus Diversifier PHOLIO; Virtus Diversifier PHOLIO Owns (IGE), (DBC), (DBV)

Terranova Is Chief Alternatives Strategist Of Virtus Investment Partners, Ltd.; Virtus Investment Partners Owns More Than 1% Of (ABD), (ARE), (BIG), (CNW), (OFC), (DLM), (DRH), (DLR), (EPR), (EXR), (FL), (SLB), (LNET), (MAC), (DBC), (DBV), (SKT), (UA), (BLV), (VV), (CLB), (GWX), (IGE), (FSMXX); Virtus Investment Partners Owns Seagate Tax Refund Rights; Virtus Investment Partners Owns Seagate Technology Tax Refund Rights; Virtus Investment Partners Owns More Than 1% Of Shares Of Incitec Pivot Ltd.; Virtus Investment Partners Owns More Than 1% Of Shares Of Essex Property Trust Inc.

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