The market is just as human as you and I
August 21st 2007 09:51
Active markets do not act independently on their own but are actually a reflection of human decisions and movements of capital. Perhaps this is what some would say 'the collective wisdom of the majority' and in some cases, the opposite. Whether the collective wisdom is the true wisdom in a strict sense is another story.
It is suffice to say the market is as human as you and I. Being human, we know that sometimes we act irrationally and so will the market because it is essentially 'human', which forms the very basis that modelling the market is a difficult task because markets do not function independently nor can it be experimented in a control environment of a laboratory.
Larry Swedroe of BAM Advisor Services LLC, puts it this way: ...'Lehman’s models (as well as the models of many other hedge funds) may have made such a forecast, but all that proved was that the models were wrong. These events have occurred in the past, and they have done so with a fair amount of frequency. In fact, we had a very similar crisis in the summer of 1998, just ten years earlier.
The hedge fund Long-Term Capital Management [LTCM] was founded in 1994 by John Meriwether (former vice-chairman and head of bond trading at Salomon Brothers). Myron Scholes and Robert Merton who shared the 1997 Nobel Memorial Prize in Economics sat on its board. LTCM had early successes producing annualized returns of over 40 percent in its first years. Then, in 1998, it lost $4.6 billion in less than four months and became the most popular example of the risk that exists in the hedge fund industry. In early 2000, the fund folded. LTCM, failed because its models told them the same thing that Rothman’s model had told him. As Spanish philosopher Santayana warned: “Those that cannot remember the past are doomed to repeat it.” '
Having a model that could predict the outcome of the market is what everyone would love to have but its not entirely possible. In the end 'the collective wisdom of the majority' can kill any grand models or give life to it if it wishes to.
And so we have the 'collective wisdom' taking a change for the past two trading sessions. After opening the week with a loud bang, the Australian sharemarket today experienced a see-saw session, a reflection of on-going concern and fear, but ended the trading session slightly in the positive zone. The benchmark ASX S&P 200 index added 56.8 points to 5,989.4 points.
The concern is still in the air despite the Feds decision to lower the discount rates to financial instituition in an attempt to boost liquidity. That was the 'collective wisdom of the day'.
It is suffice to say the market is as human as you and I. Being human, we know that sometimes we act irrationally and so will the market because it is essentially 'human', which forms the very basis that modelling the market is a difficult task because markets do not function independently nor can it be experimented in a control environment of a laboratory.
Larry Swedroe of BAM Advisor Services LLC, puts it this way: ...'Lehman’s models (as well as the models of many other hedge funds) may have made such a forecast, but all that proved was that the models were wrong. These events have occurred in the past, and they have done so with a fair amount of frequency. In fact, we had a very similar crisis in the summer of 1998, just ten years earlier.
The hedge fund Long-Term Capital Management [LTCM] was founded in 1994 by John Meriwether (former vice-chairman and head of bond trading at Salomon Brothers). Myron Scholes and Robert Merton who shared the 1997 Nobel Memorial Prize in Economics sat on its board. LTCM had early successes producing annualized returns of over 40 percent in its first years. Then, in 1998, it lost $4.6 billion in less than four months and became the most popular example of the risk that exists in the hedge fund industry. In early 2000, the fund folded. LTCM, failed because its models told them the same thing that Rothman’s model had told him. As Spanish philosopher Santayana warned: “Those that cannot remember the past are doomed to repeat it.” '
Having a model that could predict the outcome of the market is what everyone would love to have but its not entirely possible. In the end 'the collective wisdom of the majority' can kill any grand models or give life to it if it wishes to.
And so we have the 'collective wisdom' taking a change for the past two trading sessions. After opening the week with a loud bang, the Australian sharemarket today experienced a see-saw session, a reflection of on-going concern and fear, but ended the trading session slightly in the positive zone. The benchmark ASX S&P 200 index added 56.8 points to 5,989.4 points.
The concern is still in the air despite the Feds decision to lower the discount rates to financial instituition in an attempt to boost liquidity. That was the 'collective wisdom of the day'.
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