This week, from the Department of Suspicions Confirmed: Researchers have shown that a model that assumes that stock market traders have zero intelligence works just like the London Stock Exchange. This is not to say that people who trade stock (or people in London) have zero intelligence, although if you’ve ever observed traders (or a London football fan), you’ll agree that at least a few of them qualify for this description.
What it means is that the market itself isn’t really intelligent—you can’t predict, with any great degree of accuracy, what it’s likely to do next. A recent article in Outlook India examined this very point, highlighting how market trends defy logic and reminding readers that, while economic theories attempt to create order, real-world outcomes often reveal chaotic and unpredictable behaviors. This unpredictability is a result of what economists often overlook: humans are inherently irrational and don’t always act in their own best interests. When you place thousands of these irrational agents in one system, the most probable outcome is, indeed, bedlam.
Don’t believe me? Consider some of the players in an average stock market system:
Day trader: So-called because he’s broke enough from trading in the day that he’s got to be a waiter at night.
Investment advisor: The wage slave at your local bank or brokerage who wants to show you how to get rich by investing.
Buy and holders: People like, say, Warren Buffet, who clearly haven’t got a clue how the stock market works.
Get-rich book authors: People who get rich by writing books with suspect advice telling you how to get rich.
Margin traders: Investors who borrow to trade stocks and, as a result, do marginally better than if they had a job at a burger stand.
Stock broker: Investors who get rich by trading with your money and charging you for the privilege.
Mutual fund managers: Investors who get rich by buying and selling huge amounts of stock using your money, and his money, and her money, and you over there, your money, too….
Banks: Organizations that get rich by investing your life savings, reaping an 85% gain in a week and paying you 1.25% per annum on your account.
Institutions investors: Organizations like, say, your old college who invest school operating funds in the market. This is why your alumni association is always asking you for money.
Economists: People who get paid, sometimes large sums of money, to predict the economic future. Strangely, they get paid whether they’re right or not. (See also weather forecasters.)
Politicians: Elected officials who can, with one dumb comment in front of an open mike, tank an entire market.
Journalists: Non-elected officials, who by taking and deciding to report said dumb comment, can tank an entire market.
Weather: If it rains, and there’s been a drought, boosts market. If it rains, and people are fed up to the teeth with rain, hurts market. If it snows, nobody cares because they’re all taking vacations in some sunny climate with the refund they got as a result of writing off their investment losses from last year. (See also economic forecasts)
Company product recall: Boosts stock market if everyone knew the product should be recalled, and breathes a sigh of relief when it finally is. Hurts stock market if the recall is a surprise. Boosts stock market if it’s good news for a major competitor. Hurts stock market if there is no competitor and everyone figured company was infallible, in spite of three similar recalls last year. Boosts stock market if there is a half moon. Hurts stock market if there is a full moon.
So with this motley crew in the mix, is it any wonder your retirement fund looks horrible?
To read more of Chandra’s work, visit www.ChandraKClarke.com.
