The Three Reasons Why Stocks Go Up (and Down)

Given the tremendous uncertainties regarding future cash-flow, interest rates and other economic factors, there is obviously little justification for relying solely on financial figures to predict stock prices. Psychological factors play a much greater role in stock prices than economic variables.

Briefly there are three psychological factors which cause stock prices to go up (or down): Fallacy of Composition (a group of rational people acting together can cause an irrational result), Herd Mentality (the vast majority of people are imitators), and Recency Bias (we tend to place more weight on recent events and extrapolate from those into the future).

Understanding these three human foibles should be enough to formulate a profitable investment strategy.