Rumors have always been the fuel of financial markets. The modern Wall Street saying “Buy on the rumor, sell on the news” would not have been surprising to any Dutch trader in the 17th century. As Joseph de la Vega wrote in Confusion de Confusiones, his book about the Amsterdam Stock Exchange, in 1688:

The expectation of an event creates a much deeper impression upon the exchange than the event itself. When large dividends or rich imports are expected, shares will rise in price; but if the expectation becomes a reality, the shares often fall; for the joy over the favorable development and the jubilation over a lucky chance have abated in the meantime.

The figures shown at the right in this painting of the Amsterdam exchange, painted around the time of de la Vega’s book, appear to trading the latest hot rumor:

 Deliberately spreading false rumors was one of the most effective tactics for profiting on stocks in the 18th century. In his pamphlet “The anatomy of Exchange-Alley,” published in 1719, Daniel Defoe wrote:

There are those who tell us, Letters have been order’d, by private Management, to be written from the East-Indies, with an Account of the Loss of Ships which have been arriv’d there, and the Arrival of Ships lost; of War which the Great Mogul,when they have been in perfect Tranquility, and of Peace with the Great Mogul,when he was come down against the Factory of Bengale with One Hundred Thousand Men, just as it was, thought proper to calculate those Rumours for the Raising and Falling of the Stock, and when it was for his Purpose to but cheap, or sell dear.

As it was then, so it remains in modern times.

Rumors on Wall Street, the great investor Benjamin Graham once said, reminded him

…of the oil man who went to heaven and asked St. Peter to let him in. St. Peter said, ‘Sorry, the oil men’s area here is all filled up, as you can see by looking through the gate.’ The man said, ‘That’s too bad, but do you mind if I just say four words to them?’ And St. Peter said, ‘Sure.’ So the man shouts good and loud, ‘Oil discovered in hell!’ Whereupon all the oil men begin trooping out of Heaven and making a beeline for the nether regions. Then St. Peter said, ‘That was an awfully good stunt. Now there’s plenty of room, come right in.’ The oil man scratches his head and says, ‘I think I’ll go with the rest of the boys. There might be some truth in that rumor after all.’

Rumors may be even more powerful than reality because anticipation is limited only by the extent of your imagination, while getting exactly what you had expected leaves you with nothing left to hope for. Recent research in NEUROECONOMICS has shown that the human brain activates more intensely when it anticipates the prospect of a future gain than when it experiences the actual gain.