In the 1950′s, a psychologist named Solomon Asch made a startling discovery about the power of peer pressure. He asked experimental subjects to determine the length of one line relative to three other lines. When there was no peer pressure, subjects found it to be a simple test and had 100% correct answers. When there was peer pressure-in the form of confederates of the experimenter who all loudly gave the wrong answer-more than 75% of the subjects also gave an incorrect answer in order not to be out of step with the crowd. It was clear from the control group results that none of the subjects were really confused about the length of the lines, but when faced with group members who all apparently saw the same thing, lots of subjects buckled under.
Every time I see a press release from the CFA Society (full disclosure: I am an affiliate member) that details how many people take the CFA exam every year, I think about Solomon Asch. This year, for example, 128,600 candidates from 154 countries have registered for the June exams. (You can see the press release here.) That is a lot of CFAs in training! There is no doubt that their particular form of fundamental analysis is the dominant method of securities analysis in the world today. More than that, their influence has spread to infect thinking about diversification, asset allocation, portfolio theory and beyond. They’ve developed a large curriculum of readings to reinforce their position and these days it is hardly ever questioned.
Technical analysis is a much older form of securities analysis, one that relies not on theories about how markets operate but on market-generated data such as price and volume. It often continues to be useful when markets don’t operate according to the rules, i.e., most of the time. Technical analysts tend to be a pragmatic lot. They go with what is working, and when it stops working, they get off and go on to the next thing.
The CFA program, in contrast, promotes deep thinking about complex systems, fundamentals, and causation. It doesn’t surprise me that it is hard to be right about things that have so many variables. And I always wonder if they might be missing something by all approaching the problem with the same mindset. Is there pressure to conform to the accepted theories? Do all the lines look the same length to them?
In the financial markets, when everyone is looking at a market and thinking the same way about it, usually it does the opposite of what is expected. I suspect there is a lot of value in approaching asset allocation from a different point of view.
