Highly connected people & impact of “Collective Behavior” on Economies & Markets?
Over the years, I learnt that managing and understanding, markets, finance and economies, is real science, with complex modelling challenges. One of the first theories I learnt was the efficient vs inefficient markets. Great investors, earn money because of market inefficiencies, which is inevitable because markets are driven by humans & computers (which are programmed by human). Regardless how disciplined people are, their behavioral biases affect their financial decisions, causing them to act on emotional drivers, fear, greed or even poorly processed information. I recall reading, early 90’s, that behavioral influence on markets amounts to about 15% of all influences. Let’s examine the markets in 90’s vs today (refer to my book, Human Model for more details if you want to understand how markets behave today, as current analytical tools and methods are obsolete, including prevailing market and economic models which are failing). Today, connectivity on the web is huge & diversified, faster, longer & real-time, with much bigger access to huge information including access to analysis tools, reports etc., while % of connected people is huge (4 billions vs 45 millions in 90’s), beside increase of those involved in trading. If we agree that people’s collective behavior has significant impact on markets, then based on number of connected people, frequency of connection, time & speed of connection, we find that the “collective connectivity factor (CCF)” is substantially bigger than 90’s.
Compared to market & economic fundamentals, which should drive markets, the collective people’s behavior impact is much bigger, which makes challenging to rely on existing, tools, theories & models to analyze markets. I am aware that a new science called “Behavioral Finance” was created to deal with this, however, not sure it caters for recent connectivity impact. Also not sure many traders know about, including economists.Also, I am aware of AI & Analytics based tools, used, but whether these are adequate or not, I am not sure. The past 15 years taught us that markets are not well understood nor dealt with effectively, including by governments & their organizations. This may explain the prevailing chaotic markets and global economic situation, facing helpless analysts, experts and economists. See recent chaos on hiking & reducing interest rates! See the abnormal changes in bonds’ returns, past few years ! See attempts to control inflation in many countries ! See the muddled attempts by many central banks and governments to stabilize economies. See debt accumulation and its pace in many major countries ! The world today is indebted by more than 2 times its total GDP, is this normal & acceptable ?
Is there a need for a new market and economic models and theories, using new tools ? The answer is a Big Yes.
See “Human Model” Book for more explanation and details, including a proposed innovative modeling concept of markets, human, society and more.
You will find answers to many questions we all facing today.
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