INVESTOR PSYCHE ANALYSIS (IPA) THEORY
-- originally written in 2016
I am continuing to immerse myself in novel analytic techniques with the goal of unearthing yet to be discovered mathematical variables, formulas and simulations that possess predictive potential with respect to stock price movement
The continued development of analytic methods in professional sports has revolutionized the methodology behind optimization of team composition and evaluation of skillsets in prospective athletes pre-draft, and it has also driven advances in probabilistic results-based situational gambling
For almost a decade now I have thought that a Sabermetrics approach to equities would pay enormous dividends but until my project this summer, had never fully dedicated myself in this direction -- the difference between stock price movements and sporting outcomes is that back-testing is only theoretically possible in the latter domain, requiring thought experiments that can only predict, at best, approximate verdicts -- however, in the realm of the stock market, reverse engineering is likely the most optimal fashion with which to identify unique statistical variables that can be directly compared to pre-existing variables in order to create new statistical methodologies that can vastly outperform existing models -- back-testing is not merely a tool utilized to evaluate novel explanatory factors; rather, it is the entire machine
I have already developed several new stock-based and price-based variables which appear to consistently improve predictive accuracy for the direction of price movements over periods lasting between 3-8 weeks under certain conditions
But what far more greatly excites me is the possibility of doing something entirely novel
Fundamental analysis is largely a stock-based undertaking
The assumption that universal properties of a given stock (earnings, revenue growth, convertible debt, etc) make it not just singularly attractive to a particular individual but more generally attractive to the investor masses is essentially self-fulfilling based on how investors generally learn the language of stocks, similar to how non-natives generally learn to speak a new language based on verb conjugation, subject/object relationships and descriptive vocabulary
Factors inherent in the application of technical analysis -- RSI, dollar volume, stochastic, etc -- are all largely price-based metrics
So while fundamental analysis and technical analysis deal with stock and price properties, respectively, there is a strange omission from this dualistic catalogue
The third side of the triangle is popularly referred to as sentiment
But is there really any factor-based analysis of sentiment besides the colloquial "hyped-up" or "out of favor"?
No.
There are encyclopedias written about the hundreds of different stock-based factors descriptive of the fundamentals of a company -- this is the language of stocks
There are encyclopedias written about the hundreds of different price-based factors descriptive of the technicals of a stock -- this is the language of price
Based on my project this summer, I can likely add several new factors to these catalogues....
BUT...
Where is the encyclopedia written about the hundreds of different investor-based factors descriptive of the psyche of the prospective investor?
This is the language of the investor...
Stocks don't select themselves
And stocks surely don't select the prices at which they are bought and sold
In the end, an individual investor makes a litany of conscious and unconscious decisions in the convoluted pathway towards the selection of a particular stock, though the characteristics driving the vast majority of these decisions remain essentially undefined and nameless
I would like to put a name to these anonymous decision-points and a label on the wide variety of characteristics which comprise the variables in the cognitive formulas that drive specific stock selection — why this stock is preferentially chosen over that stock
I call this INVESTOR PSYCHE ANALYSIS or IPA
The principal goal of IPA THEORY is the accurate prediction of human behavior in specific stocks within a given sector during a mania
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INVESTOR PSYCHE ANALYSIS (IPA) FACTORS
Here are some of the factors along the convoluted pathway from Awareness to Selection:
Awareness >> Relevance >>> Information >>> Popularity >>> Likeability >>> Winnability >>> Urgency >>> Selection
Name Awareness
Equity Awareness
Sector Awareness
Company Awareness
Macroeconomic Relevance
Microeconomic Relevance
Situational Relevance
Personal Relevance
Information Availability
Information Transmittance
Information Dissemination
Information Eyeballability
Information Comprehensibility
Information Favorability
Estimated General Popularity
Presumed Sector Popularity
Choice Popularity
Company Likeability
CEO Likeability
Investor Likeability
Conditional Winnability
Probability Winnability
Trade Winnability
Procrastination Urgency
Initiation Urgency
Duration Urgency
Termination Urgency
Selection Confidence
Selection Clarity
Selection Strength
Sleek
