As I was reading Dan Ariely's book, Predictably Irrational, I realized that the ideas of anchoring and arbitrary coherence can explain a lot about financial market behavior. The idea of arbitrary coherence is that while we may not know how to value something in the first place, once we are anchored to a specific value we can more easily price similar things that are ranked relative to that anchor. The classic example uses the price for a big screen TVs. Without having seen other prices, we may not know how much we should be paying for the TV itself, but we know that a 52" TV is better than a 42" TV which is better than a 32" TV. As long as we have a price that we can anchor our expectations to, whether that be what we last paid for a TV or the price of a 42" that we saw in an ad, we have a coherent rational for why we would pay other prices. In the market, anchoring is even more important because wherever the market is anchored is the market expectations. An upside surprise relative to the expected anchor will move the market in one direction, and a downside surprise will move it in the opposite direction.
Earnings seasons is a great example where the importance of anchoring in financial markets can be widely understood. Companies guide down earnings estimates (the anchor) so their results will come in better than expected during earnings season, keeping their investors happy. Except for value investors, most people in the stock market judge stocks via arbitrary coherence. They don't know what the true value is, but they know that if retail sales are weaker than expected then the company is worth less than it was the day before.
The same anchoring effect is present in the bailout discussion. TARP itself was created to be an arbitrarily large size relative to previous expectations in order to shock the markets into stopping their shadow bank run. It ended up creating an anchor of future bail out expectations. The European bailout fund is measured in size relative to TARP. Europe's package is still too small if Spain needs help, but at least it seems like a large enough size so the CDS market calmed down considerably over the weekend.
Anchoring and arbitrary coherence aren't the best way to understand long term fundamentals, but they are useful tools in understanding the market movements that occur on a week to week basis.