How to study Stock market trends - Ron Insana Things don’t always work as they should on Wall Street. However, financial markets send signals about the future of the economy. Markets can move in advance of what is known to the general public. In a broad view, markets seemingly anticipate political events. In other times, the markets will anticipate economic events long before the investing public understands what’s going on in the general economy. The market is also good at discounting a transformational event. When the market more than anticipates all future revenues and all the future profits that would accrue to the new phenomena, a bubble or mania develops. The most interesting part of the mania is the repetitive nature of the phenomenon …show more content…
Economists have liked to invoke the principle of rationality as an underlying component of their theory on EMH. This has been useful but it’s limited because people are not completely rational. Humans have limits. We are aware of other people’s weakness and have a tendency to exploit weaknesses. Psychologists, Daniel Kahneman and Amos Tversky, created what is considered the most famous element of behavioral economics; prospect theory. Prospect theory is a theory of how people form decisions about prospects. A prospect is a gamble or a decision made about uncertainty. Within prospect theory, the value function represents how people value things. The weighting function infers how people deal with probabilities. People don’t weigh gains and losses the same. What they found is that people’s value or utility diminishes as they gain more. But for losses, it’s the …show more content…
A probably is measured between zero and 100%. Kahneman and Tversky noted that for very small probabilities, people round the probability to zero. For high probabilities, people round up to one. If people decide not to round the probability to zero or one, they exaggerate the difference between zero and one. For most people, there are three probabilities; the event can’t happen, the event might happen or the event will happen. Prospect theory explains much of what happens in finance, but prospect theory doesn’t explain everything. Other biases, such as overconfidence and cognitive dissonance, cloud thinking. The tendency for overconfidence produces anomalies and opportunities for manipulation. Cognitive dissonance is a judgmental bias people tend to make as they can’t admit when they are wrong. People will cling to old beliefs and try to find evidence to support their beliefs because they have an ego involvement with the
In the same vein, the housing bubble is similar to Michael Lewis’ “Liar’s Poker” in which, two of Lewis’ co-workers gamble and bluff their way to win the game (653-657). “Liar’s Poker” is a great personification of how Wall Street works. Most stockbrokers gamble and bluff their way through economic situations however, gambling and bluffing can only get you so far. Alternatively the same is said about
Imagine a challenge that tests our ideas about money and how we respond to it under certain conditions. This test involves the auction of a twenty-dollar bill with very simple rules. The highest bidder will get the bill and the second highest bidder receives nothing but pays the amount of the losing bid. As the test progresses players in the room bid above the face value ending the bid at twenty-eight dollars. The question now is, ‘Why would anyone want to pay above the face value?’ Behavioral economists believe that when decisions are made on value, the human mind often behaves irrationally. People judge value based on prior knowledge fed to them at some point in their lives and not something thoroughly researched. This is the kind of misinformed
An assumption that economists make is that individuals try to benefit their lives as much as possible. Basically they invest in things that don’t necessarily make them happy, but will benefit them in the long run, or just things that give utility. Another assumption is that firms always try to make the most money they can. The joke about why the entrepreneur crossing the road is perfect. The example he gives to prove that maximizing utility doesn’t go hand in hand with selfishness is about a women who died in her nineties who lived her life as a laundress lived in a small apartment with little in her apartment such as a black and white television. She wasn’t poor and even gave away $150,000. Her utility she gained was from saving her money than spending it on lavish things. This goes to show that everyone gets utility from their lives in different ways. Maximizing utility is just a way to live life comfortably. Many things hold utility, even those that are
Dan Ariely is a Behavioural Economist, and has written this book fantabulously. He has added humour to talk about human emotions. He takes a lot of interest and finds it interesting figuring out of what really influences Human behaviour and decisions.
In United States the correlation among real economic activity and lagged real stock returns is optimistic and statistically and economically important. Countries such as Canada, Japan, Germany and the United Kingdom and several other European countires hold a similar relationship. Even though the correlation is important and stock returns provide important informatio...
In “The Economic Approach to Human Behavior,” Gary Becker describes his explanation of “the economic approach” as being how individuals choose the price they are willing to pay for a good as a rational choice determined by the payoff of the good, based on their preferences for that good. Becker believes that prices, preferences, payoffs, and costs may include intangibles or unknowns. Thus Becker’s “economic approach to human behavior” is the belief that any human decision can be explained by a cost-benefit analysis by the decision-maker with the available information, where he/she decides the utility gained by making that choice is greater than the cost. The amount of information collected to make a decision is also determined by the preferences toward the amount of information necessary to make a decision and cost of acquiring that information. He believes that just because the preferences behind an individual’s decision are not understood, does not mean that individual did not make a rational decision. Using this approach, all human behavior and decisions can be rationalized because the approach explains how individuals make their decisions, not necessarily the specifics of why.
Economics is a science that examines how the individual side of people made a choice. Viewed with or without the use of means of exchange (money) in order to utilize scarce resources in producing a range of goods and services, and distribute it among them for consumption purposes, at present or in the future, among various individuals and community groups ( Samuelson, 1979). From the description of proficiency level, there is one thing that the main problem faced by humans in all fields of harnessing everything or scarcity. That's the main problem, was born two underlying reasons for the presence of economics as the study of human behavior. First, the limited resources for life, society, organizations and individuals. Second, the fact that the needs (needs) and desire
According to Thaler and Sunstein, people do not always make rational choices and those choices would present themselves quite differently if they had unlimited and cognitive abilities and unlimited will power. The two argue against the notion of the perfectly rational individual that exists in economics textbooks (Nudge 6-7). They reject that individuals most of the time make terrific choices, and if not terrific certainly better than any third party could do (Nudge 7). Real people suffer from a variety of cognitive biases and errors. People have trouble with long division when they don’t have a calculator and often forget their spouse’s birthday (Nudge 6). To be blunt, individuals are bad at calculating risk and are mentally lazy.
Rational choice theory is the argues that patterns of behavior in societies are caused by the choices made by individuals as they try and maximize their benefits, while at the same time, minimize their costs. Rational choice theory contends that people make rational choices based on their goals which in turn controls behavior. The theory assumes that individuals are motivated purely by self-interest and the desire to maximize their interests. A key in rational choice decision-making is that individuals have perfect information before making a decision.
An 'economic cost-benefit analysis' approach to reasoning sees actions favoured and chosen if the benefit outweighs the cost. Here, the benefits and costs are in the form of economic benefits and costs, such as, monetary loss or profit. One who is motivated by such an approach will deem a course of action preferable if doing so results in an economic profit. Conversely, actions will be avoided if they result in an economic loss (Kelman 1981).
Previous work on this question has assumed that scarcity does not aftereffect basic characteristics because “neoclassical economics maintained that people were rational, selfish actors who consistently made decisions in their own best interests” (Cara Feinberg, 2015). In other words, this means neoclassical economics believed that individuals make decisions that best suits them. However, more recent work has tentatively found that conditions of scarcity inevitably causes counterproductive behavior. In the article “Science of Scarcity”, author Cara Feinberg, introduces the works of Mullainathan and his colleagues, Eldar Shafir, and Anuj Shah. Theses researchers conducted different scientific trials to prove how scarcity of money effects both a person's basic characteristics and their cognitive
Almost everyone in our society engages in economic decision making at some point. Budget constraints influence us all and our economic decision making. In a perfect world, the sum of all our expenses should never exceed the availability of our money. The basis of economic decision making is one’s desire to maximize benefits while minimizing costs. “Economist reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost – in symbols, where MB=MC.” Hubbard, R.G. & O’Brien, A.P. (2013).
Individuals make economic decision based on a variety of reasons. The rational is based on each individual’s need or desire for a commodity. People go through several decision-making processes before making the final decision and are often not conscious of the process. Obviously, decision- making covers a wide area, involving virtually the whole of human action. Often people are not conscious of the process.
The theory of Nash equilibrium by John Nash (1951) has been a central concept in game theories and further more for a wide range from economics even to the social and environmental sciences studies. Besides the game theory, David (2012) has recalled that, there are three unrealistic traits of standard economic model of human behavior – “unbounded rationality, unbounded willpower, and unbounded selfishness – all of which behavioral economics modifies.” However, consider the assumption of Nash equilibrium theory, there is a hypothesis about all players in the game they are rational and understand the rule of the game. Which means they do know about their opponents choices and what reaction they are going to choose with the goal of profit maximization (or their own objectively goal). In the following there will be a further discussion and line out the practicality of Nash equilibrium.
The stock market is an essential part of a free-market economy, such as America’s. This is because it provides companies the capital they need in exchange for giving away small parts of ownership in their company to investors. The stock market works by letting different companies sell stocks to gain capital, meaning they sell shares of their company through an exchange system in order to make more money. Stocks represent a small amount of ownership in a company. The more stocks a person owns, the more ownership they have of that company. Stocks also represent shares in a company, which are equal parts in which the company’s capital is divided, entitling a shareholder to a portion of the company’s profits. Lastly, all of the buying and selling of stocks happens at an exchange. An exchange is a system or market in which stocks can be bought and sold within or between countries. All of these aspects together create the stock market.