By Adam Walker, Economics Correspondent 

Wolves and Sheep

The Two True Stock Market Forces

The behaviour of the stock markets and the speculation surrounding them has been a source of debate for decades.

Corporations have gained and lost millions in hours due to shifts in trends and demand with a variety of experts claiming to recognise patterns and forecast behaviour changes. There is no doubt that speculation is one of the most powerful forces in financial market behaviour, with events such as the current Ukraine crisis playing havoc with global share prices. However, the long-term behaviour has always followed a regular pattern of lucrative booms and crushing lows.

When the data is analysed, there is a lot more evidence supporting the idea markets are reactive rather than predictive. They succumb to the basic human emotions that, thanks to the recent financial crisis, we have become all too familiar with. Namely, greed and panic.

Greed By Any Other Name

Hollywood has done a thorough job of investigating the greed associated with those who exist within, and/or manipulate, the stock market. Films such as Wall Street, Boiler Room, Trading Places and Wolf of Wall Street have shed light on how these mysterious figures ply their trade, conveying them (particularly in the case of Jordan Belfort) simply as salesmen who don’t understand the mechanics of the markets but do understand human psychology. For those wishing to see how the Wolf of Wall Street proves nothing has changed in the financial sector, I highly recommend Nathan Lee’s article “The Boy Who Cried Wolf”.

These films also encapsulate the presence of greed fuelled by personal gain and ego-centric personalities that force unsustainable growth in markets before their inevitable crumble. Forbes published a particularly poignant article written by former Lehman Brothers partner Michael M. Thomas in 2008 entitled “When Greed Takes Over” following the corporation’s fall. It discussed how individual avarice had forced the company into an irreversible and high-risk buy-out that ultimately fell apart, leaving entire economies in financial disarray and many jobless.

This is, for many, the defining moment when the financial crisis became a reality. The definitive case study reveals the effects of irrepressible greed and uncontrollable panic destroying an institution “too big to fail”.

However, by taking a step back, a much bigger trend becomes apparent, one which follows the same behavioural pattern and suffers from the same collective greed.

Panic: The Only Human Reaction

By the end of 2008 the Western Economy had seen the aftering effects of greed and unstoppable panic as the stock markets almost halved in value. Trillions of dollars had been lost, numerous financial giants had gone bankrupt and the world felt the cold grip of recession begin to squeeze. A few had seen this coming and warned of the impending disaster but for the most part people had, at a fundamental level, simply reacted to the news with fear and desperation.

To illustrate this, below are two graphs. The first shows the market performance for the FTSE 100 from 2004 to present (Yahoo FTSE 100 Index). The second, from Google Trends charts the number of mentions and searches for the term “financial crisis” during the same period.

Stock Market                 Stock Market

They illustrate that a trend increase as stock markets began to crumble. Furthermore, the trends peaked at the end of 2008 with the markets following at the end of January 2009, showing at least some of the damage was caused by fear and rumour.

Although an element of the media is reacting to disappointing market performance, it is odd how the two graphs follow an almost perfect inverse correlation. This indicates that the market forces are not only entirely reactive, but entirely dependent on people’s beliefs rather than factual data.

So why do we hand the keys to our economic wellbeing to salesmen who market their products on both greed and fear? A far more terrifying thought is whether our market growth is simply driven by salesman “selling the dream”, and our collapses fuelled by the fear of it being taken away from us? Regardless of whether that is true or not, the idea alone is worrying enough.

Wolves and Sheep: The Recipe for a Marketplace

For every Wolf of Wall Street there are always thousands of sheep being herded. Some of them are the people at the bottom of the organisation, others are those being sold the dream. By understanding that those selling to us are not experts but simply merchants with certain tools we can begin to see through the haze and get a clearer idea of where we stand. We, by our very nature, tend to overreach and, as such, we lose what we have gained. But can we change this, gain wisdom from our errors and become a more stable economic body moving forward?

Can our character change our destiny.

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