[ExI] Psychology of markets explanations

[Stathis Papaioannou]

2009/5/31 painlord2k at libero.it <painlord2k at libero.it>:

>> 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.

The buyer hopes to sell higher, but a certain type of trader sees an
increasing price as an indication of upward momentum which will make
him more profits, and a decreasing price as the opposite. Demand goes
up as the price goes up, pushing the price up even further. This is
the basis of "technical analysis". Ultimately, prices come to reflect
fundamental value, but the consequences when this process runs away
can be devastating for the economy, as we have seen.

>> 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.

The supply won't grow unless people are attracted to sell more, the
demand won't grow unless people want to buy more, and the
supply/demand relationship won't be what it is unless people try to
maximise the sell price and minimise the buy price. The economic law
arises from the relationship between available resources and the
expected behaviour of the market participants.

> 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?

However the Earth moves, it must be as a result of the various
physical forces. Whatever the economy does, it must be as the result
of human behaviour within a particular environment. What's
controversial about that?

>> 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?

No, but the planes won't fly. There were no planes flying 200 years
ago, even though the laws of physics were the same.

>> 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.

Which implies a certain psychological state. If the psychological
state were different, the limits would be different.

>> 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).

Yes, but this is consistent with the point that the market would not
play out the same *regardless* of any change in the participants'
behaviour.


-- 
Stathis Papaioannou