A bit of psychology

The psychology behind the stock market is very interesting.

It never fails to amaze me the thought process that goes on inside people who stays at the sidelines despite the up and downs of the market.
When it goes up, they think it is too expensive to buy already, when it goes down, they are scared the market is getting worse and will get worse some more, when it goes sideways, they are unsure.. so they never buy. In the end, it is the FEAR of losing money that drives this thoughts. So they play save to keep whatever they have than risk losing what they have.

Averaging up or down is also the same. As the price drops, ppl average down thinks that by buying lower and lower, their average price is lower so that when it goes up again, their margin will be better than if they just bought at the first price. Averaging up, the person thinks that since it is a rising star, as long as the price goes up, it is fine buying more and more.
In both circumstances, the thought process behind is the same... you buy because you have confidence in the stock/company and think it will go UP(eventually, in the case of averaging down). Afterall, that is the only reason ppl buy anyway. Averaging is also basically acknowledging the fact that no one can time the market perfectly(buying right at the bottom or selling right at the top). Another reason ppl average is due to circumstances that they have money coming in and wishes to continue to invest in the stock they like. But the underlying thought process remains the same.