Human behavior consistent in capital markets

Humans are consistent anyway. Lots talk about the beauty of free markets, but only so long as prices are going up. The higher and faster, the more irrational the pricing, the more confident humans get. But when necessary and inevitable mean reversion begins, the same ‘free market’ lovers start doing everything they can think up to stop price discovery from happening. While policymakers and participants chalk price gains up to their own genius and skill, they are quick to blame conditions beyond their control for the losses that follow.  In the end reality always has its way and reprices assets back below fair value.  By then of course, the masses are not buying but liquidating their losses in horror. We can learn from all of this and do the opposite.  But it takes thinking more than feeling, and a commitment to personal discipline.

The deflating bubble in Chinese stocks is uncannily similar to Nasdaq’s dotcom boom and bust. James Mackintosh, FT investment editor, analyses what we can learn from history and whether desperate efforts by authorities to pump up prices bring any hope.  Here is a direct video link.

Also see: China setting up stock fund to stabilize market.  Funny no one was talking about trying to “stabilize” Chinese stocks after they had shot up more than 100% in 12 months.  It’s only after they start mean reverting at the speed of light that people start wanting to “stabilize” prices at a ‘new permanently high plateau’.  The rule of irrational exuberance in asset markets:  prices typically fall 3 times faster than they rose.  Par for the course.

This entry was posted in Main Page. Bookmark the permalink.