You’ve gotta love this: “Science unveils hidden drivers of stock bubbles and crashes”
Unfortunately, this article is not about the economic science behind the Austrian Theory of the Business Cycle. It starts with:
Many economists believe that investors make decisions rationally… “This way of looking at things is almost completely wrong,” [said psychoanalyst David Tuckett]. “Markets are operated by human beings.”
Individuals do make decisions rationally – afterall, we do have all that gray matter. But you and I are in no position to second guess another’s motives, and so we can not model or predict them. They may appear irrational after the fact or by a third party, but decisions are nonetheless made through rational thinking.
Yet, as Tuckett correctly points out, markets are operated by mere mortals. Perhaps he is referring to ATBC? Maybe the Austrians are right after all, since one behavioral analyst claims:
[I]nvestors may think less about the intrinsic value of a stock and more about the perception of its value.
No luck – apparently it is this focus on perceived value instead of “trying to value a stock on their own best terms” that causes volatility in the market. We have wrong-headed value systems because we are at the mercy of our hormones, incapable of rationality. It is these hormones that cause bubbles and crashes – not the mere mortals who try to run our economy at the Fed. So now you know.
But I wonder – what is the underlying cause of the changes in hormones? That probably doesn’t matter…at least my hormones don’t think it matters.
One thing that Tuckett has right:
The ‘Master of the Universe’ really does believe in his own invincibility
I can think of quite a few Masters of the Universe that are under this delusion, but they’re not on the trading room floors.
9:31 am on September 19, 2008
