speculators in economic theory

I recently started university and I am taking economics courses but everything we have been taught so far seems to not take into consideration the role of speculators. An example is when we are learning about supply and demand we are simply taught that with things such as oil OPEC simply could cut supply and then the public would bid up the price to adjust for the change in supply. What I am wondering is does economics ever consider the role speculators play in the market place? Also if economics doesn't take these things into consideration then couldn't that lead to conclusions about future prices that aren't actually that justified?

Thanks Jason

 

One point i think is very important in learning econmic theory is that you have to always understand the assumptions of the theory first.

The demand and supply model you are learning is a very "pure" model. From this point to the role of speculator, we have long way to go. By long way, I mean maybe after you finish your university undergraduate programm, you still learn nothing about that in economic theory.

I don't know if you are a stock trader, however, the useful tool in economic course is econometrics, which is the tool for pairs trading.

As to speculator, maybe some fields of finance would help you in undersanding the role of speculator in trading. These fields like microstructure and behavior finance.

Finally, maybe is more important, if you really want to go to those fields including econometrics, be sure you are willing to deal with math.

 

speculators in economics are generally seen as being rewarded for taking on risks which other market participants dont want to take on. economic theory regards speculators as simply all liquidity providers for hedgers etc.

however this has become increasingly outdated. one look at some highly speculative vehicles such as currency and energies will show that in some cases the guys holding the huge positions are speculators (armanth). This results in greater volatility and instability of the financial system.

 

Hi Jason,

Be wary of mixing theory and reality, you can wind up with the worst of both.

Firstly, you need to complete your degree following the manner prescribed by your University and then it is on into the real world.
Just always keep in mind that there is theory and there is reality. Both have their places in life and over time they will merge and they will stray.

In the most part, people cope with this very well because society ( or at least the one we all live in) has blended a concoction of grey whereby people are inclined to claim more credit for their own actions than these efforts deserve.

It is when they bring this blended grey to the trading table that trouble rears its head.
There is no "if" in trading.
Either you are making money or you are not!

 

That is correct. However, the another side of this definition actually is to say that any market participants are speculator.
Why? Because of the different time intervels traders have. The risk short term trader don't wnat to take is not big deal for traders trading on longer time.

So, if we link speculator to risk, then we have to consider the timeing dimension of risk. The risk in short time is not necessary the risk in long time. Without taking timing into consideration is the weakness of most of economic and finance theory. Put in simply, use suppy and demand theory as as example, does this theory tell you WHEN change would happen?

 

First of all I would be questioning any instructor that gives OPEC even enough credit for being able to manipulate the price of oil in the least. Current price activity in the oil markets is proving my point as we speak and most analysts versed in the crude markets agree that today OPEC has difficulties in controlling crude prices (much more political than economic). A more accurate depiction of supply and demand is that of a local market, auction house and monopolies.....but that really isn't your question anyways.....

The speculator is usually under estimated, under emphasized, and totally under appreciated by most economics professors and students. You are a clever student to be thinking about the influence of speculators upon the markets, politics and society at large.

Many here have alluded to the risk/reward ratio aspects associated with speculators. Of course this is probably the most telltale mark of the role of the speculator, but if you accept the study of economics as being as much a social science as a study of financial forces, then the speculator becomes even more powerful and important.

Of course its easy to say the greater the risk = the greater potential reward. But what impact does this really have upon the markets and finance overall. These days hedge funds are associated with mass speculation and great risk taking. I would also argue that while hedge funds are not new nor a recent vehicle for investment (hedge funds have been around for decades), rather their recent proliferation is really the point of interest.

While supply and demand are market forces, the speculator, some might argue, is essential for liquidity and greater wealth distribution. In the end one could also argue that many societies throughout the world and history have been propelled forward through its speculators. One could also make a point that the markets that contain the more speculators tend to be much more open, free in nature, more solvent and stable (evidence of stable governments and consistant monetary policies).

I think what is of much more interest is the study of market/financial cycles, speculators actions during these times and how their actions contribute to boom and bust.