Do you think that the world is in real as you seen it? And if yes is that a realistic point of view? I mean we only understand what our mind can understand, that is and our biological limit.
For example, imagine an animal e.g. a cat. Cats are having less level of intelligence than humans by nature. Therefore, they understand things different that we do, for example a cat seen as a nice and cozy bed the laptop keyboard. Why that happened? Cats like to sleep on our keyboards because when a laptop is on produce heat. So the cats utilize it and use it as a queen sized - bed. From the other point of view, humans invented the laptops for a dozen of other activities expect sleep on them.
My point is that maybe the things that we use daily for some other will be more complicated and useful than a bed.
Let’s transfer all the above in our Financial System and in particular in financial bubbles. Are stock markets what we think they are or they hiding other human needs? As we know Stocks are another way for companies to gain money, cheaper than bank loans and more complex in their management structure.
In that particular article we are going to analyze from the psychological point of view the financial bubbles. How they take birth? How all that system continues performs? Are bubbles mankind hobbies? And if yes, why is that happened? Is human’s psychology the only critical factor developing all those extreme phenomena?
Here is the point where behavioral finance takes place. Yes, everything in our world is human-mind products. We produce the bubbles. It is an x-ray of our own behavior. We are not robots, we having feelings and an extreme way to express them sometimes. That is exactly what Stock markets - bubbles stand for, an overreacted situation where the 95% of investor’s correlation tend to be 1. This is the moment where the big-money party takes place and every one issued-entrepreneur is B-happy (B = billionaire). As a result everything goes up from real estate market, where the bubble phenomenon starts usually (see 2008), to a small Chinese firm in the countryside of NJ, which having no future. Everything goes up and there is nobody that want to stop that craziness and you know why? Because “WE WANT MORE AND MORE” every time. It’s basic sociology, it is human.
Stocks are the perfect investors cardiograph. For investors stocks are the heard of the financial system. It was founded for that reason. Stocks are the investor’s prospects for a company. So if you want to invest don't look only the numbers, look the powerful people around the industry and market as well. Their prospectives are valuable. Their decisions influence the "stock world" and they can ruined it in seconds. They don't care about the numbers they are the numbers. One recent but not the only example for the above statement is the announcement of G.Soros that he selling all the gold position in 2011.
In conclusion, we create the Stock markets to refill a need, we talking for a kind of need except make money. Have that only as image in 2000-2006 - 2013-14 companies went public because it was a prestige move and a smart marketing move in order to promote their services/products. Therefore, this strategy help them to attract investors who where ready to invest in theirs company stock.
Stocks are not only gambling as the majority of people think. It is a system which we created and try to predict the future and the uncertainty. In accordance with game theory we observe zero sum games module. If you think about Stocks with more open minded thinking, stock markets tend to be a zero sum game, with a statistic error of less than 5%. Statistical error applied to missed information - money deficits e.t.c..
CG
Master in International Business candidate HULT International Business School, Boston MA
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