Why does the market defy rationality?

Discussion in 'Trading' started by dearinfinity, Apr 15, 2009.

  1. ^

    Specifically, why are financials and REITs surging on the homebuilder index, while mortgage foreclosures are soaring and the moratoriums are ending?

    Which humans are accounting for these surges? Moms and pops? Average people? I find it hard to believe that at this point the major market movers are still responsible for the rally. What is the breakdown of % volume of joe person vs. fund? Why would private funds who understand--or should, at least-- how poor the fundamentals truly are, risk by buying into this kind of market? Who is convincing the middle class to pour their cash back in?
  2. Lucrum


    Why does the market defy rationality?

    Why do people try to defy the market?
  3. lindq


    Because the market often trades on expectations, not on present reality. And a lot of money is being positioned on the expectation that the housing market will, sometime in the future, begin to come back.

    This is why the "efficient market theory" is so wrong. It generally states that everything that is known is already priced into the market. But it leaves out of the equation an important factor often influencing pricing, which is expectations. And they aren't quantifiable.
  4. The market often moves contrary to apparent common sense and world events, as if it had a mind of its own, designed to fool most of the people, most of the time. It is therefore foolish to try and anticipate the movement of the market based on current economic news and current events.

    Jesse Livermore
  5. i think you're missing the point,

    who cares about rationality? since when is the market rational?
  6. eagle


    That kind of question indicates that you aren't yet in sync with the market, and once you've got enough experience then you stop asking "silly" question such as why people are greedy or fearful.

    If the market were to be rational (someone whose actions and decisions are based on reason rather than emotions or beliefs) then what will happen? Everybody will know its direction in advance, shall be UP or DOWN, and then there will be no market at all.

    The market is operating for Future Valuation (somebody already mentioned the word Expectation) based on little incomplete current information and when Greed and Fear put into the equation as well then lots of people start to scratch their head and ask the question like you asked.
  7. Welcome to the way the markets operate.
    If you are just starting out, learn to separate rational logic with what is actually happening.
    If the markets are soaring on horrible news, it is telling you something that you should not try to fight by sheer logical inference.

    I doubt the bulk of the momentum is initiated by mom and pops. However, something I observed on the last significant bottom;
    the market was near its worst right about tax time, and after taxes were over, the market seemed to magically lift from there on out.

    One theory is many were forced to sell to come up with tax payments owed, and those with the pockets to buy kind of waited (or shorted) a bit until the desperation selling was done.

    Just an observation IMO.
  8. There's a famous quote about solvency and market rationale - when you understand it you will succeed.
  9. 1. First paragraph is the principle of efficient market theory.

    2. Second paragraph shows you have a wrong meaning in your mind of the expression.
  10. lindq


    Efficient-market hypothesis
    From Wikipedia, the free encyclopedia
    In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or property, already reflect all known information. The Efficient Market Hypothesis was developed by Professor Eugene Fama at the University of Chicago Booth School of Business as an academic concept of study through his published Ph.D. thesis in the early 1960s at the same school. It was widely accepted up until the 1990s, when behavioral finance economists, who were a fringe element, became mainstream.


    Bite me. :D
    #10     Apr 15, 2009