The logic of the market
August 6, 2012 in Euro Crisis, Investment, Smart thinking
The market may not be rational – that we now know – but it has an inexorable logic. In this third and last post on the mental toolkit we need to be responsible managers (from ” This will make you smarter” click back to the previous blog, please) let’s look at Nigel Goldenfeld, professor of physics at the University of Illinois’s contribution, with the wonderful title: If you’re facing in the wrong direction, progress means walking backward.”
We need to understand causality he says. What really are causes and effects? And he uses our reasoning on the rise and fall of the stock market as his example. This is where the inexorable logic comes in:
The pundits on Bloomberg may blithely remark that the market went down because people were taking profit, or because of the ECB’s statement on the Euro. But for every stock sold there was a buyer with a diametrically opposite view of the market. This inexorable logic, that there must be a buyer for every seller, makes a single reason given, a single cause offered for market fluctuation simply illogical and therefore wrong. Says Goldenfeld ” To assign a single dominant cause to most market moves is to ignore the multitude of market outlooks and fail to recognize the nature and dynamics of the temporary imbalances between a number of traders who hold differing views.”
Ike Jakson said on August 6, 2012
Very good Bertie
You have this one right on the button as they say in America.
I have often asked the “clever guys who know all” on the radio to explain to me who is buying and who is selling the [let’s call that an average] 10 billion a day of stuff on our little JSE but only get hmmms and ?Haaah’s.
BTW, I call it manipulation.
IkeJ
Bertie said on August 9, 2012
One some of the large American stocks McKinsey calculated the market is dominated by as few as 100 players.
Ike Jakson said on August 10, 2012
Bertie
I would guess that source to be pretty accurate.
Chris said on August 7, 2012
Hi Ike, that’s easy – it’s the brokers churning stocks to make the commissions that pay their salaries and outrageous bonuses ;-(
Bertie said on August 9, 2012
And the currency market is even worse!
Ike Jakson said on August 10, 2012
Bertie
Right again; add to that the cesspool in Forex and you have the real reasons for the World Financial crisis. It has nothing to do with Greece or Spain.