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Showing results for tags 'behavioural finance'.
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Note: Dbphoenix & gassah, you are the moderators here and if you guys should feel this thread belongs more in the Psychology forum, I perfectly understand if moderators move it over there. ______ Below is a quote from Soultrader posted in another thread, but I thought it was more appropriate to take the discussion here. Although I don't want anybody to think this is strictly Wyckoff related, it might encourage a discussion about "The Basic Law of Supply and Demand". A lot to think about in only a couple of sentences there. I'm not sure that price can rise without demand, as Soultrader says... If there's no demand for a product/good/stock, the suppliers will have to lower price because in each auction process the purpose is to find an equilibrium point so a transaction can take place, right? VSA talks about "no demand" and "no supply" and we often read traders talking how "price fell of itself". So price can fall of itself (lack of demand), but how many people say price rises without demand (lack of supply)? What Soultrader is saying touches some of the very foundations of economics 101 imo. We've all been taught price rises because demand outweighs supply and vice versa. Marginalist economic theory tells us that consumers will try to reach their most preferred position, a point where any further increase in consumption of a specific good (or service) no longer provides them extra "utility". So why would they buy at increasingly higher prices if previously the same good/utility/stock was available for them at a lower price? Soultrader wrote "higher prices will attract more buying", so he's saying that price itself has an impact on what buyers and sellers do. Does the 'law' of supply and demand no longer works because people don't act rationally? The demand for goods and commodities is generally thought of as the result of a utility-maximizing process... Micro-economics tells us, given any set of goods, each participant in the economic process/system will try its best to obtain the best point of equilibrium which means that the consumer will strive towards utility maximization. But what if this isn't the case? What if the supply & demand in itself is only a factor in an economic system where some perverse mechanisms are at work to trick those participants? Some empirical research into the field of behavioral economics tells us that there are psychological causes behind many types of not-so-smart financial decisions (plenty of examples in this book). I think what Soultrader is saying here, touches some of the very foundations of economics 101. We've all been taught price rises because demand outweighs supply and vice versa. Marginalist economic theory tells us that consumers will try to reach the most-preferred position, a point where any further increase in consumption of a specific good (or service) no longer provides them extra "utility". Now... you're saying that price itself has an impact on what buyers and sellers do. Does the 'law' of supply and demand no longer works because people don't act rationally? What if the supply & demand in itself is only a factor in an economic system where some perverse mechanisms are at work that make us humans make decisions that are far less than optimum? Are these elements that influence our decisions subconsciously in a sense that we can't control them? What about traders self-sabotaging their plan? Back to supply and demand, does the so-called anchoring effect (where people's decisions are overly influenced by specific information or value or a bias towards any of those) come into play? Some experiments seem to imply that we -sometimes- let our objective measures of 'value' be influenced by seemingly unrelated elements. How about the experiment (described in this book) where students were asked to write down (a) the last two digits of their social security number and (b) the maximum price they were willing to pay for a bottle of wine, a book and a box of chocolates. Surprisingly, the security numbers had an influence on their bids and there was a clear pattern! The higher the numbers, the more the students were willing to pay. In that case, price was not being determined by the interplay of supply and demand but - as Ariely wrote - "determining itself". So how about the 'basic law of supply and demand', are there holes in the micro-economics package that teaches us this is the reason why price fluctuates?
