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Market Psychology & Behavioural Finance

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Market Psychology & Behavioural Finance

Narrative Fallacy

The tendency to construct coherent stories that explain past events, giving false confidence about their predictability.

Test: a causal story is accepted because it is coherent, without testing whether the same story would have predicted the outcome in advance qualitative Market Psychology & Behavioural Finance

Noise Trading

Trading on information that carries no genuine signal about value.

Test: the trade is prompted by rumour, pattern or sentiment rather than by information that changes the asset's expected cash flows qualitative