[ExI] Psychology of markets explanations

[painlord2k at libero.it]

Il 31/05/2009 3.31, Stathis Papaioannou ha scritto:
> 2009/5/31 painlord2k at libero.it<painlord2k at libero.it>:
>> Il 30/05/2009 4.50, Stathis Papaioannou ha scritto:
>>
>>> The law of supply and demand is an emergent phenomenon supervening on
>>> social psychology. The supply-demand curve would be affected if people
>>> prefer to buy more of a product if it is more expensive, for example.
>> Where do you see this happen?
>> I never saw this happen in 40 years of my life.
>
> It might happen with certain exclusive luxury items.

False, because the "exclusive luxury items" are not bought for their 
usefulness, but only for the status they confer. They are symbols. The 
buyer buy the item for the status it confer (or he think it confer). The 
law of supply and demand is the same as usual even in this case.

> It also happens
> sometimes with financial market, which is what leads to bubbles.

The buyers buy because they hope to sell higher. They don't buy at an 
higher price on purpose. In fact, to maximize their gains they will try 
to buy at the lower price available at the moment. The fact that 
sometimes they are wrong in their foresight don't invalidate the law of 
supply-demand.

> But that is not the point: the point is that it is peoples'
> actual psychology, whatever it might be, that causes them to behave in
> a particular way, leading to the observed economic laws. If you had an
> elaborate computer model of the economy and you could change any
> variable, changing psychology would change the outcome.

Changing the atmosphere in an artillery simulator will change the 
trajectory, but will not change the law of gravity. Changing the rate of 
revolution of the Earth will change the trajectory, too. But will not 
cause the law of gravity or the attrition of the air to change.

I would recommend the first chapter of "Man, Economy ans State with 
Power and Market", where the law of supply and demand is explained. It 
is easy and it is logic, it don't need any explanation of the psychology 
of the agents. The motives of the agents buying and selling are theirs 
and don't change the law.
If the supply grow (all other equal) the price will not raise; if the 
demand grow (all other equal) the price will not fall. It is all here.
This is true for anything, anywhere, any time. If it appear not true, it 
is because you are interpreting the data incorrectly.

It is like you look at the planets and see them moving around the sky in 
strange patters, with loops for some. A man understood that positioning 
the Sun at the centre of the system all the orbits become circular and 
similar. Another come and showed how the orbits could be calculated and 
others added why the bodies moved in this way and another come up to a 
way to prove that the Earth have a revolution every 24 hours.

But you could continue to believe that the Earth is at the centre and is 
still. Is it what your eyes show to you? Why do you must doubt your eyes?

> The world would be very different if there were no planes flying due
> to peoples' beliefs. In order for planes to fly not only do the laws
> of physics have to make it possible, the planes must also be built.

So, if people don't believe in the plane physics, is the physics show 
wrong?

> Being a "rational agent" implies a certain psychological state.

It implies that there are lower limits to the prices you will sell and 
higher limits to the prices you will buy. Limits dictates by your order 
of values.

> If
> many participants in the market were "irrational" then it would change
> the market, perhaps to their detriment and everyone else, as we see
> in boom and bust cycles.

An irrational agent in a market could buy at prices too high or not buy 
at prices low enough; or he could be buying too much or not enough. This 
would imply he is incurring in losses. These losses must be added to the 
losses due to his rational errors (due to his inability to speculate 
always correctly about the future).


> And even if everyone conforms to a definition
> of "rational" you still have to explain the actual demand for a
> product, the level to which the demand will be sensitive to price
> changes, what the beliefs about future prices are and how this will
> affect demand, and so on. Psychological states and physical resources
> are the basic interacting elements out of which the economy emerges. I
> don't think there is anything radical in this statement.

The psychology or the conditions at hand could change the scheduling of 
the wills of the agents involved, sure. Psychology could help explain 
the behaviour of the agents, but do not invalidate the law of 
supply-demand. Different psychologies or conditions could change the 
shape of the curve as they change the demand and the supply. But the law 
is always the same.

"If the supply grow (all other equal) the price will not raise; if the 
demand grow (all other equal) the price will not fall."

Mirco
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