Psychology of the Stock Market by G. C. Selden

G. C. Selden’s 1912 book, Psychology of the Stock Market, made available as an eBook by Project Gutenberg. The author, who worked with The Magazine of Wall Street, presents the central argument that stock price movements are heavily influenced by the mental attitude and behavior of the public and traders rather than solely by fundamental economic conditions. The text proceeds to analyze various psychological elements of speculation, including the cyclical patterns of the market, inverted reasoning employed by professional traders, the concept of “They” (the elusive market controllers), the process of “discounting” future events, and the dangers of allowing one’s personal position to bias judgment. Ultimately, the book offers advice for both long-term investors and active traders to maintain a clear, unbiased mental attitude to navigate market booms, panics, and the subtle interplay of speculative psychology.

Who May Benefit from the Book

• Active stock market traders and speculators.
• Investors seeking objectivity in market decisions.
• Financial writers and opinion shapers.
• Analysts studying emotional influences on prices.
• Anyone battling personal biases in high-stakes environments.

Top 3 Key Insights

1. Short-term market fluctuations are mainly driven by the psychological attitudes and varying states of mind among traders.
2. The market consistently reflects the future; prices often rise or fall to “discount” news and conditions before they are publicly announced.
3. Because market strength is measured in capital, not headcount, the majority of small traders are usually wrong at market extremes.

4 More Lessons and Takeaways

1. Successful trading demands absolute detachment; one must prioritize the objective position of the market rather than their personal position in it (i.e., profits/losses).
2. Professional cynicism leads to “inverted reasoning,” where good news is treated as a selling opportunity by insiders, a dangerous concept for novices.
3. Extreme prices in panics result more from the absolute necessity or exhaustion of available liquid funds than from a sudden, widespread spasm of terror.
4. To achieve success, the individual must strictly exclude all emotion—including enthusiasm, fear, and anger—to maintain a clear and unruffled intellect.

The Book in 1 Sentence

G. C. Selden analyzes how human hope, fear, and faulty reasoning perpetuate the repeating psychological cycles governing stock market prices.

The Book Summary in 1 Minute

Psychology of the Stock Market argues that while long-term market trends rely on fundamental economic conditions, the shorter, intermediate fluctuations are governed chiefly by the mental state of traders. The entire market undergoes a repeating “speculative cycle” driven by alternating hopes and fears. This cycle sees large capitalists accumulating stocks during periods of dullness, eventually driving prices up until the general public enters excitedly near the top.

Selden outlines key psychological traps: 1) Inverted Reasoning, where professionals distrust obvious news; 2) Confusing Discounting, where traders fail to realize that current good news has already been reflected in prices; and 3) Personal Bias, where traders allow their commitment (long or short) to cloud their objective judgment. Both panics and booms involve excess: panics push prices down through necessity (lack of liquid funds), while booms are inflated by irresponsible traders and false wealth impressions. To succeed, the individual must remain a detached, reasoning optimist, stick to common sense, and learn to discern the true trend of market sentiment regardless of personal position.

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Chapter-wise Book Summary

Introduction

Psychology of the Stock Market, written by G. C. Selden and originally published in 1912, is founded on the core premise that price movements on exchanges are highly dependent on the “mental attitude of the investing and trading public”. While broad, multi-year market movements are determined by fundamental financial conditions, the intermediate fluctuations—amounting to five to ten dollars a share—are chiefly psychological. The book serves as a “practical help” to the community interested in markets and attempts a “preliminary discussion in a new field” of psychological research in finance. Selden examines how varying mental attitudes affect the market’s course, and how the individual trader can overcome his own emotional obstacles, such as hopes, fears, and obstinacies.

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I—The Speculative Cycle

“The broad movements of the market, covering periods of months or even years, are always the result of general financial conditions; but the smaller intermediate fluctuations represent changes in the state of the public mind…”.

The movements of prices repeatedly follow a typical pattern known as the speculative cycle. While broad movements rely on fundamental conditions, minor fluctuations (five to ten dollars a share in active stocks) are primarily psychological, stemming from the mental attitude of those interested in the market. The cycle begins with dullness and low public interest, during which prices start to rise almost imperceptibly, often attributed solely to small professional operations. As prices harden, timid short sellers cover, and the public starts to believe there will be opportunities to buy on reactions; however, significant reactions often fail to materialize. Eventually, the public concludes the market is “too strong to react much” and rushes to buy. As prices climb, investors begin selling once their profit limits are reached, supplying a “permanent load” of stock that differs from transient speculative business. The market eventually becomes “top-heavy,” and the largest speculative holders, finding a sufficiently large market, begin distributing their shares. Once distribution is complete, the decline is usually faster than the advance. The cycle culminates in a rapid downward collapse triggered by stop-loss orders, known as a “bargain day,” where shrewd operators and investors buy cheap, and the market returns to lethargy. The entire sequence is fundamentally a reflection of human hopes and fears.

• Chapter Key Points:
  • Market psychology drives short-term fluctuations.
  • The largest speculative holders sell (distribution) when public buying is highest.
  • The short interest is generally largest at low prices, often helping to avert panicky conditions.
• Important Quote: “The movements described are substantially uniform, whether the cycle be one covering a week, a month, or a year”.

II—Inverted Reasoning and Its Consequences

“This apparent contrariness of the market, although easily understood when its causes are analyzed, breeds in professional traders a peculiar sort of skepticism—leads them always to distrust the obvious and to apply a kind of inverted reasoning to almost all stock market problems”.

The average person finds it difficult to oppose general public opinion. In the stock market, public opinion is not measured by the number of participants, but by the “horse-power” of their capital (“dollars”). By necessity, the multitude of small traders must be long at the top and short or out at the bottom. Since journalists and writers often reflect the opinions of this bullish multitude, their commentary is more likely to be wrong regarding speculative fluctuations. Consequently, successful professional traders often develop a skepticism that leads to “inverted reasoning,” where they distrust the obvious. For instance, if bullish news is announced following a considerable rise, the professional trader might cynically assume the news has been released by insiders attempting to sell their holdings, and thus they sell short. This inversion can be applied to favorable industry figures or even large purchases through known capitalist brokers. While this type of reasoning is useful at market tops or bottoms during distribution and accumulation, the inexperienced trader finds it dangerous and confusing, as nearly every event can be interpreted in two opposing ways. The safest rule is to “Stick to common sense,” maintain a balanced mind, and avoid abstruse deductions, particularly when trying to support one’s existing market position.

• Chapter Key Points:
  • Public market opinion is weighted by capital, not population.
  • Cynicism causes professionals to interpret good news as a selling signal.
  • If committed to a side, avoid using inverted reasoning to rationalize that position.
• Important Quote: “The press reflects, in a general way, the thoughts of the multitude, and in the stock market the multitude is necessarily… likely to be bullish at high prices and bearish at low”.

III—“They”

“The close student of the technical condition of the market… is pretty sure to base his operations to a considerable extent on what he thinks They will do next”.

The concept of “They”—an influential force or group that controls price movements—is prevalent among nearly all traders, regardless of experience. “They” can be conceived in three senses: 1) Floor traders, pools, and manipulators who directly influence quotes and immediate fluctuations. Floor traders, for example, can “mark up prices” by snapping up limited offerings to engineer a small upward move. 2) A group of powerful capitalists (like the Morgan or Standard Oil interests) who initiate broad, simultaneous market campaigns. Such associations are often loosely bound and can only undertake campaigns when the future is somewhat assured. 3) The most definite definition: speculators and investors in general, scattered globally, who possess the purchasing power to absorb securities—the “ultimate consumers” to whom everyone else plans to sell. Although the “They” theory is often based on hazy thinking, it provides many traders with the necessary psychological courage to act contrary to the immediate appearance of the market—for instance, buying during extreme weakness by assuming “They” are just shaking out stocks. However, Selden recommends that sophisticated traders replace the “slipshod thinking” associated with the word “They” with a genuine knowledge of the market’s technical condition, classifying the sources and motives of buying and selling.

• Chapter Key Points:
  • The “They” theory is widespread among traders.
  • Floor traders exercise significant psychological influence on quotes and short moves.
  • For clarity, replace the vague term “They” with an understanding of classified buying/selling motives.
• Important Quote: “It is to Them that everybody else is planning, sooner or later, directly or indirectly, to sell his stocks”.

IV—Confusing the Present with the Future—Discounting

“It is axiomatic that inexperienced traders and investors, and indeed a majority of the more experienced as well, are continually trying to speculate on past events”.

Inexperienced traders mistakenly speculate on past events, such as published large earnings, failing to realize that prices have already risen to account for that information—a process called “discounting”. The human mind automatically assumes present conditions will continue, which is why market judgment is often obscured by the present. Intelligent speculation must be based on anticipating future events. Events controlled by associated capitalists or banking interests are likely to be thoroughly discounted, as there is always sufficient capital to take advantage of known certainties. Conversely, unforeseen events (like the San Francisco earthquake) cannot be discounted. Sometimes, news can be overdiscounted if rumors exaggerate the expected outcome. Uncertainty itself can depress the market, regardless of the eventual outcome of a decision or event, because business men fear to move forward with plans. When an event is uncertain, the market reflects a balancing of probabilities based on opposing views, where dollars (capital) ultimately outweigh the number of buyers or sellers. Extreme prices usually hit their climax when the news is most emphatic and disseminated. The professional trader focuses on what the news is causing others to do, rather than the facts themselves, but the non-professional should avoid such ambiguous reasoning.

• Chapter Key Points:
  • Prices reflect anticipated future conditions, not current results.
  • Unforeseen or truly unpredictable events cannot be discounted.
  • The problem is always to look into the future and ask: “What next?” after the climax of news has passed.
• Important Quote: “If the movement of prices has not preceded [the news], then the news contributes to the general strength or weakness of the situation and a movement of prices may follow”.

V—Confusing the Personal with the General

“Until you try it, you have almost no idea of the extent to which you may be rendered unreasonable by the mere fact that you are committed to one side of the market”.

A major difficulty for active traders is maintaining an unprejudiced mind when heavily committed, as personal hopes unconsciously sway judgment. People naturally twist logic to back up their desires. However, the market is “relentless” and demands that one fit their interests to objective facts, rather than trying to fit the market around their trades. Success requires the trader to entirely forget their own position in the market—their profits or losses—and focus solely on the position of the market. Arbitrary rules like taking a fixed profit (e.g., seven points) are foolish because they attempt to make the market conform to the trader’s individual deal. An intelligent class of investors often holds on too long because they observe continuing bull news and fail to appreciate that prices have already fully discounted the improved business situation. The strong-willed, determined man often struggles because he cannot apply force to the market; he can only use observation. The expert must constantly prevent his imagination from seeing technical indications (like “holes” in the market) that he is looking for, simply because he is short or long. Ultimately, when bull sentiment is most widespread and emphatic, the market is likely near the top, and vice versa.

• Chapter Key Points:
  • The market demands objectivity; personal commitment warps judgment.
  • Successful trading requires observation and interpretation, not force or will.
  • Be ready to sell when bull sentiment is most widely distributed.
• Important Quote: “In the market, to be consistent is to be stubborn”.

VI—The Panic and the Boom

“A psychological influence of a much wider scope also operates to help a bull market along to unreasonable heights”.

Both panics and booms are intensely psychological events, often resulting in price movements excessive to what fundamental conditions warrant. The panic is not a sudden development; caution and fearfulness spread and grow over months or years until the final crash. Crucially, the lowest panic prices are usually caused by necessity rather than mere fear—resulting from sales by those whose immediate funds are exhausted and who cannot realize quickly. The key to recovery lies in the “accumulation of liquid capital”. The boom is the psychological reverse: confidence spreads, leading to “hilarity” among inexperienced traders who use “shoe-string margins” to pyramid profits, driving prices unreasonably high and forcing prudent short sellers to cover. A deeper psychological influence assisting the boom is the delusion of increased wealth created by rising commodity prices; for example, a wholesale grocer might count inventory increases as real profit, leading to extravagance and further speculation throughout the economy. This entire pyramid of mistaken impressions eventually collapses. The stock market declines first, acting as a barometer to forewarn general business. The bull movement ends when liquid capital is exhausted, indicated by rising call money rates and a declining bond market.

• Chapter Key Points:
  • Panics arise from a necessity born of exhausted immediate resources.
  • Booms are fueled by irresponsible margin trading and perceived wealth from inflation.
  • The market’s decline is essential, serving to temper the inevitable crash in general business.
• Important Quote: “It is generally more difficult to distinguish the end of a stock market boom than to decide when a panic is definitely over”.

VII—The Psychology of Scale Orders

“These speculators are a crazy lot and there is no knowing what passing breeze might strike them that would cause a temporary decline of a few points”.

Operators reflect two general mindsets: the “impulsive” and the “phlegmatic”. The impulsive trader acts on conviction, buying outright and selling when conditions change. The phlegmatic investor, prominent among large capitalists and bankers, rarely buys on advances. Instead, he places scale orders—orders to buy or sell incrementally (e.g., every half point down) to capitalize on small, temporary market fluctuations. The scale orders placed by phlegmatic operators inherently oppose the momentum generated by impulsive traders. In a bull market, standing scale buying orders provide “support” on declines, absorbing the temporary “floating supply” of stocks that impulsive traders toss around. This support causes prices to rebound quickly. Conversely, in a bear market, scale orders are set to sell on advances, creating “pressure”. An experienced trader can gauge the technical position of the market by observing when these key scale orders are withdrawn or reversed, marking the transition from accumulation (support) to distribution (pressure).

• Chapter Key Points:
  • Phlegmatic traders (large capital) use scale orders to exploit temporary fluctuations.
  • Scale buying orders provide “support” during declines in a bull market.
  • The shift from market “support” to market “pressure” signals a trend change.
• Important Quote: “The market must decline until a part of this floating supply is absorbed by the scale orders which underlie current prices”.

VIII—The Mental Attitude of the Individual

“Your main purpose must be to keep the mind clear and well balanced”.

The eccentricities of the market often result from traders focusing on what others will do, rather than facts. For the “long pull” investor, the path is simpler: focus exclusively on Facts and Prices, such as interest rates, earning power, and political conditions, avoiding speculative sentiment. For the active trader, who must “go with the tide,” the mental attitude is paramount. He must be a reasoning optimist, believing in his ability to float with the tide, not trying to force the tide his way. Enthusiasm is detrimental and must be eliminated, as any strong emotion clouds the intellect. Stubborn adherence to an erroneous course, rather than persistence, is a common vice. Traders must beware of “getting a notion”—fixating on one factor (like good crops or radical sentiment) to the exclusion of other counterbalancing factors. An experienced trader might follow a “hunch” (an accumulation of vague, small indications), but a novice should rely on rational analysis. The most useful suggestions are negative: avoid acting hastily on sensational news, do not trade so heavily as to become anxious, and do not let your market position influence your judgment. The greatest fault to avoid is being bullish at high prices and bearish at low prices.

• Chapter Key Points:
  • Active traders must base operations largely on anticipating others’ actions.
  • Avoid enthusiasm and stubbornness, which prevent clear analysis.
  • Act on defined judgment, or trust one expert entirely; when in doubt, keep out.
• Important Quote: “The stock market is the meeting of many minds, having every imaginable peculiarity”.

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Notable Quotes from the Book

1. “Dollars are the horse-power of the markets—the mere number of men does not signify”.
2. “The main point of their argument is that the state of mind of a man short of the market is radically different from the state of mind of one who is long”.
3. “The market is relentless. It cannot be budged by our sophistries”.
4. “The psychological aspects of speculation may be considered from two points of view, equally important… the mental attitude of the individual”.
5. “A market which repeatedly refuses to respond to good news after a considerable advance is likely to be ‘full of stocks.’ Likewise a market which will not go down on bad news is usually ‘bare of stocks'”.
6. “It is the overextended speculator who causes most of the fluctuations that look absurd to the sober observer”.
7. “Historical parallels are likely to be misleading. Every situation is new, though usually composed of familiar elements”.
8. “It is rare that any considerable short interest exists in the inactive stocks”.
9. “The prudent man gets only moderate profits in a bull market—it is the man who trades on ‘shoe-string margins’ who gets the biggest benefit out of the rise”.
10. “The stock market never finds itself popular unless it is going up; yet its going down undoubtedly does far more to promote the country’s welfare in the long run…”.

About the Author

G. C. Selden is the author of Psychology of the Stock Market, which was originally published in 1912. Selden also penned other financial works, including Trade Cycles and What Makes the Market?. His writing and research focused on the belief that price movements are heavily influenced by the psychological disposition of the trading and investing public. Selden based his writing on years of study and experience, which included time as a fellow at Columbia University. He also worked professionally as a news writer and statistician, and served on the editorial staff of The Magazine of Wall Street. Selden’s approach was intended both as a practical guide for those involved in the markets and as a foundational scientific discussion in the nascent field of speculative psychology.

How to Get the Most from the Books

To maximize the book’s value, maintain a clear, balanced mind by keeping commitments small. Focus exclusively on objective facts and market sentiment, rigorously excluding personal hopes and emotional biases.

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Conclusion

Psychology of the Stock Market establishes that while macro financial conditions govern multi-year trends, the daily and intermediate movements that preoccupy traders are fundamentally psychological, rooted in the collective hopes and fears of participants. G. C. Selden comprehensively maps the cyclical movement of public sentiment, from dullness and professional accumulation to frenzied public buying and eventual panic-driven exhaustion. By detailing behavioral traps such as inverted reasoning, personal bias, and the failure to understand discounting, Selden provides a framework for analyzing the market based on its technical condition and the motives of different capital classes (impulsive vs. phlegmatic). The ultimate lesson for the individual is the necessity of strict emotional detachment, urging traders to set aside personal profits and losses in favor of objective, rational judgment concerning where the market is going next.