Defy Pavlov's Theory: Buy When the Masses Sell

”Come to the edge,” He said. They said, ”We are afraid. “Come to the edge,” He said. They came. He pushed them, and they flew. Guillaume Apollinaire

Pavlov’s Theory in Action: A Behavioral Psychology Perspective

Updated Jan 2024

Ivan Pavlov, a renowned Russian physiologist, significantly contributed to psychology by discovering classical conditioning, also known as Pavlovian conditioning. This discovery was somewhat accidental, stemming from Pavlov’s work studying digestive processes in dogs.

Pavlov observed that his canine subjects would salivate whenever an assistant, who usually fed them, entered the room. This observation led him to conduct a series of experiments that formed the basis of his theory of classical conditioning.

In these experiments, Pavlov paired a neutral stimulus (the sound of a bell) with an unconditioned stimulus (the presentation of food) that naturally triggered a response (salivation). Over time, the dogs began to salivate just at the sound of the bell, even without food. This demonstrated that a neutral stimulus could trigger a conditioned response when paired with an unconditioned stimulus.

Pavlov’s theory of classical conditioning has profoundly impacted the field of psychology, particularly behavioural psychology. It has provided a framework for understanding how learning occurs and how behaviours can be modified over time.

We can see Pavlov’s theory in various ways in the modern world. For instance, it is often used in advertising, where a product (neutral stimulus) is associated with positive emotions or experiences (unconditioned stimulus) to elicit a favourable response from consumers.

Pavlov’s Theory in Action: The Stock Market

Ivan Pavlov’s theory of classical conditioning, a concept that revolutionized our understanding of learning and behaviour, finds its application in various fields, including the financial market. The stock market, a complex system influenced by a myriad of factors, can be seen as a grand stage where Pavlov’s theory plays out.

Consider the reaction of investors to market indicators. A bullish market report (neutral stimulus) is often associated with rising stock prices (unconditioned stimulus). Over time, investors begin to respond to bullish reports by buying more stocks, even if the underlying fundamentals of the stocks do not justify the increased buying activity. This is a conditioned response akin to the salivating dogs in Pavlov’s experiment.

Similarly, a bearish market report can trigger panic selling among investors. Even the rumour of a negative report can cause market volatility, demonstrating how a neutral stimulus (rumour) can trigger a conditioned response (panic selling).

Moreover, high-frequency trading algorithms, which execute trades based on pre-programmed instructions, exhibit Pavlovian conditioning. These algorithms are conditioned to respond to specific market conditions or indicators, committing buy or sell orders when those conditions are met.

Pavlov’s theory of classical conditioning provides a valuable lens through which we can understand investor behaviour in the stock market. By recognizing these conditioned responses, investors can make more informed decisions and potentially avoid the pitfalls of following the herd.

From this point on, We will delve into this topic within a historical context, as it serves two crucial purposes. Firstly, it illustrates how those who neglect to learn from history are destined to relive it. Secondly, and of greater significance, it showcases our real-time actions. We preached and practised our principles by integrating historical knowledge with mass psychology, ensuring our position on the right side of the market.

Pavlov’s Theory in Action: The Trump Win

In early October, when the pollsters were all busy proclaiming that Hilary would win, we stated in an article titled Mass Psychology, states Trump win Equals stock market buying opportunity that from a financial perspective, a Trump win would present an excellent opportunity for the astute investor. We had made the same comments before Brexit became a reality, and it has been our theme that as long as the trend is up, all sharp pullbacks should be seen through a bullish lens. In other words, the more substantial the deviation, the better the opportunity. Here is a small excerpt from the above-stated article

Regardless of what you think of Trump, he is having the same effect as Brexit had on the markets but in smaller doses. If he should win the election, then the reaction will be several magnitudes larger. From a contrarian angle (and not a political point of view) a Trump win could be construed as a positive development; non-contrarians will demand to know why? Mass Psychology clearly states that the masses are always on the wrong side of the equation.

Doctors of Doom Exploit Pavlov’s Theory to Incite Mass Stampede

It turns out that the naysayers and prophets of doom were singing the same tired tune. Instead of walking away with bags of cash, they defeated themselves again. The market’s response was swift and dramatic: stocks plummeted, the dollar nosedived, Gold surged, and oil prices fell. It seemed as though chaos was on the brink of breaking loose. Then, in a sudden twist, the markets reversed course, shattering the brief moment of satisfaction that the naysayers had experienced.

They were left utterly speechless as not only did the markets recover their losses, but they also surged to new heights. This ongoing trend validates what we’ve consistently emphasized: much of the advice from these self-proclaimed experts is essentially worthless. The script remains unchanged: create widespread panic, make it seem like the world is on the verge of collapse, and then, when the masses believe all hope is lost, the intelligent investors step in, saying, “Thank you, followers, for providing us with another opportunity.”

Take a look at the headlines before Trump was declared the winner

If Trump is elected president, it would be ‘exceedingly harmful’ to markets

The stock market could crash if Donald Trump is elected president

Economists: A Trump win would tank the markets

President Trump May Be Bad For Markets – Forbes

Mark Cuban Predicts a Stock Market Crash if Trump Wins

When we saw all this hype and nonsense being sold as news, we quickly fired an update to our subscribers stating the following:

Note that the media utilised the critical concepts of the Pavlov Theory to trigger a mass stampede, and it worked out for smart money. The masses sold the intelligent money that came in and bought as soon as the markets tanked.

Pavlov’s Theory in Action with Trump Win

This is Pavlovian programming at its best; the signal instead of a bell is a Trump win would be a disaster for the markets; The same signal was used to trigger the sell-off after the vote for Brexit came in. It is a brilliant strategy, and it works all the time. Don’t fall for this nonsense. We do not know who will win, but we know that the top players will do everything possible to trigger a significant reaction. Ultimately, they care about the reaction and will use whatever is necessary to trigger such a response. Watching the masses stampede or turn euphoric is a game to them. They trigger a reaction in both directions; hence, they always trade with a relaxed mind. Market Update Nov 2, 2016

This ingenious yet nefarious strategy has been used for generations and likely predates even the Tulip Mania. The concept behind it is to incite a feeding frenzy or a stampede; the crowd always leaps before it looks.

Since its inception, the public has consistently found itself on the wrong side of this bull market. This is precisely why it has earned the notorious distinction of being labelled as the most despised bull market in history.

Ignore the Naysayers

While the naysayers persist in their chatter about the impending colossal correction, they seem to overlook a fundamental fact: each pullback in the market results in a higher low. Furthermore, when the market does experience a setback, it consistently trades above the targets it had set months or even years ago. One can’t help but wonder how the naysayers from 2011, 2012, or even 2014 must be feeling now.

Had they stubbornly clung to their short positions, they would have faced financial ruin multiple times over. Therefore, it’s reasonable to conclude that the majority of these individuals are all talk and no action. In simpler terms, they talk a big game but seldom take real financial risks, because if they did, they would likely be penniless by now.

Instead of experiencing a crash, the Dow is currently poised to establish a sequence of new all-time highs. A robust foundation of support is evident within the 17,900-18,000 range. Over time, we anticipate this support level to gradually shift upward, with 18,200 emerging as the new baseline.

For the Dow to reach the 19,000 level, it must consistently trade above 18,650 on a weekly basis. If it accomplishes this milestone, the possibility of reaching 19,000 could materialize within the next 4-8 weeks.

Article of Interest: Stock Market Forecast For The Next 6 Months

When it comes To Investing, Fear is for Fools.

The argument we laid out in our October article came to pass with almost perfect precision:

Just as Brexit was all bark and no bite, the same phenomenon will likely play out if Trump wins. All the Naysayers from every crack and crevice will emerge, screaming the end of the world, and when the world does not end, they will be forced to crawl under the rock again. It would be good to keep this saying in mind if Trump wins “Dance when the crowd panics and standstill when they jump up with joy.

What we’ve consistently emphasized for the past several years is unfolding exactly as we’ve predicted. It’s crucial to tune out the pessimistic voices, often referred to as the “Drs of Doom.” They have a penchant for singing sorrowful tunes, and the problem with misery is that it attracts companionship, particularly from those who let foolishness dictate their decisions.

Instead, concentrate on market sentiment and the prevailing trend. Even over the past two months, the crowd appeared nervous when the markets were still trading near their peaks.

Historically, no bull market has concluded when the crowd is anxious. Bull markets typically culminate on a euphoric note. As long as the majority remains apprehensive, corrections should be seen from a bullish perspective. Trump’s victory, much like Brexit, presented astute investors who remained unswayed by emotions with a golden opportunity to acquire high-quality stocks at a discounted price.

Bull markets end on a note of Euphoria and not uncertainty.

In the future, if you observe experts panicking while market sentiment remains negative, it’s a clear signal that they are merely blowing hot air. The most prudent course of action is often to do the opposite of what they recommend.

Regarding concerns of a market crash, it appears more probable that the Dow will advance to 20,000 rather than plummet. Remember, the greater the deviation from the norm, the more promising the buying opportunity becomes – let this be your guiding principle moving forward.

The next anticipated challenge will likely arise from the Federal Reserve’s illusory attempt to convince the masses that they are ready to implement a series of interest rate hikes. We recall the outcome of their previous bold proclamation; after just one rate hike, they swiftly retreated, spinning tales to justify their actions.

This so-called economic recovery is, in fact, a facade, and they are fully aware of it. Consequently, they are in no hurry to shatter their meticulously constructed illusion. There is a remote possibility they might raise rates once more, primarily to create flexibility before potentially moving rates into negative territory. Should the markets experience a sharp pullback in the future, be prepared to perceive it as a promising buying opportunity.

The coronavirus Sell-off is Another example of the Pavlov theory in action.

During the market’s downward plunge, we received a substantial influx of emails from both our free newsletter subscribers and a few from our premium services. Remarkably, around 90% of these emails shared a common theme: the belief that we had lost our sanity. Surprisingly, a noteworthy 36% of these emails were laced with colourful language. It’s worth noting that most of these unsavoury emails originated from those who subscribed to our free newsletter. In many cases, a fiery response could have been justified.

However, we found ourselves genuinely delighted to receive these emails. They served as valuable indicators that the prevailing sentiment was way off the mark. That’s precisely why we didn’t hesitate to respond with sincere gratitude. It may have surprised some recipients to receive a heartfelt thank-you note from us.

Our free newsletter service boasts over 40,000 subscribers, making it a valuable source of sentiment data. We understand the significance of the insights provided by these emails, and we are grateful for the opportunity to learn from our audience’s reactions.

Go Against Pavolov Theory: Buy when the masses sell

Regrettably, for the Doctors of Gloom and Doom, Pavlov’s theory opposes their intentions. It serves as a guide for students of mass psychology, indicating the appropriate course of action. Similar to how a dog learned to salivate upon hearing the sound of a bell, the Doctors of Gloom tend to start their alarming proclamations when the markets are already undergoing corrections. This data can be strategically employed to take positions that run counter to their assertions.

Before you express a desire for more people to be as brilliant as you are, take a moment to imagine how much more challenging navigating through life would become if everyone around you possessed the same level of intelligence. In the grand scheme of things, it’s essential to appreciate the presence of individuals who may not be as sharp, for they offer investors invaluable insights that can enhance one’s wealth and security.

Moreover, this data reinforces a long-held belief that acts of kindness are often met with adversity, and those who extend a helping hand may find themselves in precarious situations. It’s wise to refrain from assisting those who haven’t sought it, as they may react unfavourably and potentially harm you. It’s a stark reminder that not every good deed goes unpunished, and sometimes, a well-intentioned Samaritan faces dire consequences.

Pavlov’s Theory in Action: Naysayers Getting Burned

Those self-proclaimed wise individuals who took pleasure in criticizing us during the market downturn may find themselves shedding tears of regret if they haven’t already. They made the same error they vowed never to repeat: succumbing to the trap of fake news and hysteria, leading them to offload their shares at the market’s lowest point. It’s almost as if they acted like individuals with impaired judgment, repeating the same unfortunate mistake at precisely the worst moment. And their excuse? The familiar refrain of “it’s different this time.”

In reality, every situation in the market is distinct, and this notion is what the masses often use as justification for allowing their emotions to override logic, causing them to sell when they should be buying. This cycle of behaviour is destined to be repeated because the collective mindset tends to follow the same patterns. Thus, the adage holds misery loves company, and unfortunately, stupidity often seeks it.

Achieving success often involves adopting a strategy that’s likely to draw criticism from the majority. It’s a testament that truth can be harsh, and it certainly stings.

The privilege of absurdity, to which no living creature is subject, but the man only.

Thomas Hobbes