Wednesday, June 22, 2011

The behavior known as "conditioned response" -- made famous by Nobel Laureate Ivan Pavlov -- is easy to understand.   Ring a bell every time you feed a dog, and eventually that dog will salivate at the sound of the bell even when food is absent.   If grandma baked you apple pie each time you visited, that same smell from a bakery years later would likely evoke a strong memory of grandma's home.   Likewise, most stock market participants have by now developed a conditioned response to market downturns.   The market's overall uptrend from the early 1980s to 2000 conditioned investors to see price pullbacks as "healthy corrections."  This learned response became so entrenched that even the devastating declines of 2000 and 2007 did not significantly alter that perception. more

1 comment:

Matthew Normand said...

This is, of course, more operant conditioning than it is Pavlovian. [Ed.]