A Herd Play
August 26th 2007 07:44
After weeks of roller coaster ride in the market, the mainstream press finally made some space for behaviorial finance to explain the volatility in the financial markets that are not supposed to happen according to the standard theory lead by Eugene Fama's Efficient Market Hypothesis.
Today, Melbourne's broadsheet, The AGE, published a piece on behavioral finance for the crowds:
'ECONOMISTS don't like to think about it but, according to conventional theory, events such as the present wild gyrations in financial markets aren't supposed to happen."
[...]
'Because herds are ruled by the majority, trends in financial markets appear to be based on little more than investors' moods. These moods are generated "endogenously" — that is, by factors within the system, not outside developments.
Moods are the basis on which investors judge the way they expect other investors to value shares in the future, so they motivate current buying and selling.
Thus in markets for financial assets there's no tendency to "revert to the mean" of equilibrium. There are just the ceaseless waves of social mood, fluctuating between optimism and pessimism.'
No surprise, as over the years the performance of financial markets have created problems for the information efficiency theory leaving large gaps that demand alternative explanation of the phenomenon. And thus the behaviorial finance camp plugged the hole with their theory and empirical evidence that resonates with reality. The rival claims of the two camps have always been mentioned on this site.
Here are some of the recent related posts:
1) Fama's EMH took some hits
2) The market is just as human as you and I
Meanwhile, Friday's negative closing for the local market reflects a shaky foundation despite the relative calm and positive performance over the week. The benchmark ASX S&P 200 index shed 71.2 points or -1.16%. Across the pacific, the US market closed the week higher on the back of positive economic data and such positive sentiments are likely to be in play for the market here on Monday.
Is your mood ready for the play?
Today, Melbourne's broadsheet, The AGE, published a piece on behavioral finance for the crowds:
'ECONOMISTS don't like to think about it but, according to conventional theory, events such as the present wild gyrations in financial markets aren't supposed to happen."
[...]
'Because herds are ruled by the majority, trends in financial markets appear to be based on little more than investors' moods. These moods are generated "endogenously" — that is, by factors within the system, not outside developments.
Moods are the basis on which investors judge the way they expect other investors to value shares in the future, so they motivate current buying and selling.
Thus in markets for financial assets there's no tendency to "revert to the mean" of equilibrium. There are just the ceaseless waves of social mood, fluctuating between optimism and pessimism.'
No surprise, as over the years the performance of financial markets have created problems for the information efficiency theory leaving large gaps that demand alternative explanation of the phenomenon. And thus the behaviorial finance camp plugged the hole with their theory and empirical evidence that resonates with reality. The rival claims of the two camps have always been mentioned on this site.
Here are some of the recent related posts:
1) Fama's EMH took some hits
2) The market is just as human as you and I
Meanwhile, Friday's negative closing for the local market reflects a shaky foundation despite the relative calm and positive performance over the week. The benchmark ASX S&P 200 index shed 71.2 points or -1.16%. Across the pacific, the US market closed the week higher on the back of positive economic data and such positive sentiments are likely to be in play for the market here on Monday.
Is your mood ready for the play?
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