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“It suddenly struck me that that tiny pea, pretty and blue, was the Earth. I put up my thumb and shut one eye, and my thumb blotted out the planet Earth. I didn't feel like a giant. I felt very, very small.” – Neil Armstrong (1930-2012)

Fresh Reads from the Science 'o sphere!

Tuesday, January 27, 2009

Mass Psychology In The Markets

Here's an interesting series of video presentations that seeks to explain investor behaviour in the markets.

Click on the links below for the next few parts:

Part 2 - Investor decision-making process

Part 3 - Common investor mistakes

Part 4 - Reducing portfolio risk


You are thinking: "Dude, what's with all this money-talk on a science blog? Did you just sell out?"

Well, first of all I'm obviously not an expert on investment matters, and so I can't verify the accuracy of these presentations, let alone endorse them.

However, I do like the clear, matter-of-fact and level-headed presentation style of these videos.

And the fact that they are abysmally underviewed (even less than Fresh Brainz vlogs???) makes me suspect that their core message has not been overhyped to achieve popular appeal and thus might bear a fair resemblance to reality.

There are two additional reasons why I highlight this set of videos:

1. The economic mess that we're stuck in right now is a social phenomenon.

Pouring billions of dollars into stimulus packages is only part of the solution. Without the recovery of confidence, all that money will simply get stashed away, prolonging the recession and also becoming a future inflation hazard.

Knowledge is essential to confidence and a better understanding of investor behaviour will help to boost the recovery of confidence. These videos, at the very least, illuminate some features of investor behaviour.

In addition, the mainstream media has so far focused on reporting horror stories about the economy from the financial perspective, with practically no regard to the psychological aspects.

Markets are not made of indices; they are made of people. To ignore the human element is to ignore the chief driving force behind both the causation and the cessation of this recession.

2. Listen to the investment trade-offs discussed by the presenter.

For example: established companies give you steady gains, while new companies have potential for greater gains. But an increased potential for gains also comes with increased risk of loss.

So to protect your principal you should diversify your portfolio. But diversify too much and you will lose the potential for significant gains.

Does it sound like... molecular evolution?

Eg. deeply conserved genes tend to persist, while new genes come and go. But new genes have a greater potential for functional innovation as well as a greater risk of deleterious effects...

Here at Fresh Brainz, we believe that it's not totally coincidental that some fields of human knowledge can have an uncanny resemblance to other fields - because there may be a similar (but not exactly the same) underlying structure beneath them.

We will explore this idea in greater detail in the coming posts.

Would you like to know more?
Behavioral Economics (Wikipedia)