The Psychology of the Foreign Exchange Market (Wiley Trading)

This book demystifies the foreign exchange market by focusing on the people who comprise it. Drawing on the expertise of the very professionals whose decisions help shape the market, Thomas Oberlechner describes the highly interdependent relationship between financial decision makers and news providers, showing that the assumption that the foreign exchange market is purely economic and rational has to be replaced by a more complex market psychology. The Psychology of the Foreign Exchange Market......Page 4 Contents......Page 8 Preface......Page 12 Acknowledgments......Page 14 Introduction......Page 18 1 From Rational Decision-Makers to a Psychology of the Foreign Exchange Market......Page 24 Traditional vs. behavioral finance: A paradigmatic shift in approaching financial markets......Page 26 Economic defense of the efficient market view......Page 30 Traders’ views of rationality in the foreign exchange market......Page 33 Toward a market psychology......Page 37 Abbreviated references......Page 41 Trading decisions: The view of traders......Page 44 From objective prices to psychological theories of decision-making......Page 50 Normative–economic and descriptive–psychological approaches......Page 53 Herding and psychological conformity......Page 57 Herding dynamics in the foreign exchange market......Page 59 Affects......Page 64 Status quo tendency......Page 67 Overconfidence......Page 70 Trading intuition: Bridging affects and cognitions......Page 74 Cognitions......Page 78 Heuristics......Page 80 Representativeness......Page 81 Availability......Page 86 Anchoring and adjustment......Page 87 Hindsight bias......Page 89 Abbreviated references......Page 90 3 Risk-Taking in Trading Decisions......Page 94 Asymmetric risk-taking......Page 95 Framing and mental accounting......Page 100 Managing trading risk: Institutional and personal strategies......Page 106 Abbreviated references......Page 110 4 Expectations in the Foreign Exchange Market......Page 112 Expectations: A market time machine......Page 115 Fundamental and technical/chartist analysis......Page 117 Psychological attitudes and market expectations......Page 131 Social dynamics, meta-expectations, and the financial news media......Page 140 Abbreviated references......Page 146 5 News and Rumors......Page 148 Characteristics of important information......Page 150 Information sources of foreign exchange traders......Page 154 Information sources of financial journalists......Page 158 Implications for collective market information-processing......Page 160 Reporting trends and interdependency......Page 162 Market rumors......Page 166 Abreviated references......Page 171 6 Personality Psychology of Traders......Page 172 The role of personality in trading......Page 173 What makes successful traders?......Page 176 Disciplined cooperation......Page 177 Tackling decisions......Page 179 Emotional stability......Page 180 Autonomous organization......Page 182 Information handling......Page 183 Market applications......Page 186 Abbreviated references......Page 187 7 Surfing the Market on Metaphors......Page 190 Main market metaphors......Page 191 The foreign exchange market as a bazaar......Page 194 The foreign exchange market as a machine......Page 195 The foreign exchange market as a living being......Page 196 The foreign exchange market as gambling......Page 198 The foreign exchange market as sports......Page 199 The foreign exchange market as war......Page 200 The foreign exchange market as an ocean......Page 201 Market metaphors are about the psychological "other"......Page 203 Market metaphors are about market predictability......Page 206 Explicit and implicit metaphors of the foreign exchange market......Page 208 Market metaphors in action......Page 211 What we can learn from market metaphors......Page 215 Abbreviated references......Page 216 8 The Foreign Exchange Market—A Psychological Construct......Page 218 The market as a construct and illusion......Page 221 Market constructs change......Page 223 Abbreviated references......Page 227 Function and scope of the market......Page 230 Instruments......Page 234 Trading......Page 235 Dealing room structure......Page 236 Commercial and investment banks......Page 239 Central banks......Page 240 Brokers......Page 241 Investment companies, pension funds, and hedge funds......Page 242 Corporations and multinational companies......Page 243 Individuals......Page 244 Abbreviated references......Page 245 Appendix: The European and the North American Survey......Page 248 Abbreviated references......Page 250 References......Page 252 Index......Page 272

This book offers a fascinating understanding of the decisions that determine exchange rates. It sheds light on the psychology behind spectacular market phenomena as well as on subliminal processes in daily trading decisions.

In an understandable and engaging analysis of his research with many of the world’s leading market participants, Thomas Oberlechner draws on the first-hand expertise of the professionals whose decisions shape the market. Expanding the field of behavioral finance, The Psychology of the Foreign Exchange Market incorporates new insights from a variety of psychological perspectives - ranging from social market dynamics; the role of affects and intuition in trading decisions; cognitive biases of traders; psychological risk-taking phenomena; subjective attitudes in market expectations; the interdependent relationship between trading institutions and the financial news media; the dynamics of market rumors, and personality characteristics of successful traders; to the role of metaphors in the decisions of participants and the nature of the market.

Economists propose elegant theories and sophisticated models to explain exchange rates, but to no avail. Traders, however, enjoy uncommon success in these markets. The difference is psychology. Economists deny it. Traders exploit it. And Thomas Oberlechner explains it – very skilfully. Whether you want to be a better economist or a better trader, read this outstanding book!
-Mark Kritzman, Windham Capital Management Boston, LLC

Finally, a book that helps us to understand the dynamics of the largest market in the world. As petrodollars and financial trade foreign exchange transactions gave way to pure trading for profit and speculation, it was often difficult to ascertain the dynamics of trading. Thomas Oberlechner has provided an excellent understanding in this book.
-Marshall N. Carter, Chairman/CEO (retired), State Street Bank and Trust Co., Boston

Financial markets, with their interaction of economic and psychological mechanisms, increasingly attract researchers’ and practitioners’ interests. Thomas Oberlechner brilliantly examines financial markets by taking a psychological perspective. This splendid book impresses by its detailed research and provides a thorough understanding of the complex yet attractive mechanisms of financial markets.
-Professor Erich Kirchler, Institute for Psychology, University of Vienna

Thomas Oberlechner has pulled together an astonishing array of first-rate research on how financial markets are shaped and shifted through all-too-human interaction and decision. Moreover, he has contributed a good deal of highly original research into the workings of the foreign exchange market and on the people who build and sustain this market. The Psychology of the Foreign Exchange Market summarizes in a most readable way what we know about the people - traders, analysts and journalists - who make markets and whose everyday decision making has, to say the least, far ranging social consequences. A ‘must read’ for anyone who wonders about the seemingly unfathomable mysteries of exchange rates and the making of markets.
-John Van Maanen, Erwin Schell Professor of Organization Studies, MIT