[ExI] Psychology of markets explanations

[painlord2k at libero.it]

Il 31/05/2009 16.05, Stathis Papaioannou ha scritto:
> 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.

Your explanation don't invalidate the law of supply and demand.
The buyer that interpret the increase of the price as an indication of 
future increases is speculation on the future, like all producers and 
all agents in a market.
The fact that an agent can be wrong in its speculation about the future 
is independent from the law of S&D.
All agents are bound to fail sometimes, someone more, someone less. 
Until they shoulder the burden of the failure and receive the fruits of 
their success, there is nothing wrong on this. The problem is when some 
government decide and the burden of the failure is upon the people that 
have no choice. The government will not stop its actions, because it 
don't feel the pain it is causing and probably it is profiting from the 
actions that damage the people.


> 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.

The expected behaviour of the participants is to maximize their 
[psychic] gains. To do what they suppose will maximize their 
satisfaction inside their time horizon.


> 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 human behaviour is constrained by the law of logic.
Whatever is the human behaviour, it can not defy the laws of logic and 
the basic law of nature.

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

A different psychological state would change the order / schedule of 
needs and wills. But no psychological state will change the fact that 
human need water, food, shelter, and so on, to be able to survive, 
reproduce and so on. It don't change the fact that there are limits to 
the resources available for the exchange.

My psychological state don't make me able to buy a home if I have not 
the money to do so. My psychological state don't le me build a house if 
I lack wood and concrete. My psychological state could change my aims, 
but only my rationality help me to obtain them.

> 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.

This is banal and trivial. I don't contest this.
But it is like to say that the law of ballistic change if I change my 
mind and shoot a chicken instead of a pig. The gun will work in the same 
way, whatever the psychological state of the gunner could be.

What will not change is that the agents will try to maximize their gains 
in their time horizon. They can change their aims, they can be right or 
wrong in their speculation about the future, but when they start to sell 
and buy freely in a market, in any date time, the market will behave 
under the same basic rules:
Who that pay more will be served first, who that pay less will be serve 
after if the price offered is higher than the lower reserve price of the 
sellers. The highest and the lowest prices will converge if the 
condition remain the same and more iterations happen and so on.

Mirco
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