Blog: Welcome to the "Pavlov's Dog" Market
Markets are conditioned to buy the rate cut, but is that a good idea?
I'm sure most of you are familiar with the story of Pavlov's Dog. Basically Ivan Pavlov, a physiologist, discovered that he could make dogs salivate whenever he rang a bell. He did this through conditioning, which is basically a kind of brainwashing where whenever he fed the dogs, he'd ring a bell. After a while the dogs would anticipate food whenever they heard a ringing bell by drooling.
Many market participants have been conditioned in much the same way and we hear it all the time. Whenever there's a simple trading rule that's "guaranteed to work," it's the result of Pavlovian conditioning. These include:
- Buying on the dips,
- Stocks always go up after stock splits, and
- Fed rate cuts mean bull markets.
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