Video: Why Stock Investors Defy Logic
http://youtu.be/Bka4PzDelMQ
The Standard & Poor’s 500 stock index has climbed steadily and surpassed its 2007 peak last week, and even sluggish European markets are showing signs of life as investors rush back in.
This interregnum between the collapse of global financial markets in 2008-09 and the next bubble – whenever and wherever that may occur – is a good time to reconsider investor behavior.
In this video, Ben Jacobsen, a finance professor at Massey University in New Zealand, discusses behavioral economics, market panics, and “strange” and inexplicable behavior.
“Most people,” Jacobsen concludes, “have a great difficulty assessing risk and what risk is.”
Check out another blog post about research confirming that people tend to rush in when the market is rising and pay dearly for stocks and then sell in a panic after experiencing large losses. Morningstar data also indicate that long-term investors have better returns if they buy and stay put.
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Given that stocks are known to go up and down on a random walk, by definition, there can’t be any such thing as herd behavior. Prices are thought to reflect all available public information. What is actually happening is that when stocks go down, over-leveraged investors have to dump all at once to avoid a total loss. This is not irrational or herd behavior. When the market goes up, short sellers need to cover their shorts. This is not irrational or herd behavior. Lots of people doing the same thing when stocks move one way or the other is not herd behavior, any more than it is herd behavior when everybody opens their umbrellas at once when it starts to rain, and folds them back up when the rain stops. It’s actually quite rational.