The biggest problem to watch for as a speculator is what psychologist call Cognitive Dissonance. Cognitive Dissonance is a phenomenon in which an individual or a group of individual with an established opinion refuse to accept another point of view, in spite of new irrefutable evidence suggesting quiet another conclusion.
The stronger their original opinion, the more resistant they are to changing it and tend to persist in creating new argument in favor of their original views.
So many were convinced that the banks are headed to toilet that when some of the banks started rallying many could not simple bring themselves to believe it can rally. The banking analyst were out in force dismissing the move. Why because the market action did not agree with their strongly held belief. Since then banks have rallied 40 to 50%.
Cognitive dissonance is a theory of human motivation that asserts that it is psychologically uncomfortable to hold contradictory cognitions. The theory is that dissonance, being unpleasant, motivates a person to change his cognition, attitude, or behavior. This theory was first explored in detail by social psychologist Leon Festinger, who described it this way:
Dissonance and consonance are relations among cognitions that is, among opinions, beliefs, knowledge of the environment, and knowledge of one's own actions and feelings. Two opinions, or beliefs, or items of knowledge are dissonant with each other if they do not fit together; that is, if they are inconsistent, or if, considering only the particular two items, one does not follow from the other (Festinger 1956: 25).
He argued that there are three ways to deal with cognitive dissonance. He did not consider these mutually exclusive.
One may try to change one or more of the beliefs, opinions, or behaviors involved in the dissonance;
One may try to acquire new information or beliefs that will increase the existing consonance and thus cause the total dissonance to be reduced; or,
One may try to forget or reduce the importance of those cognitions that are in a dissonant relationship (Festinger 1956: 25-26).