Sometimes it is easy to forget markets are, in the end, made from the collective decisions of human beings. Even much-hyped high frequency traders are net-net functioning at the behest of human analysts. One reason why this is worth keeping in mind is that I so often see posts denigrating traders/investors for doing something that in retrospect looks stupid. The fact is that we are all just scared animals trying to do the right thing to survive. Tim Richards at the Psy-Fi Blog writes:
But while we often focus on the psychology of investors there’s a rather more straightforward fact underpinning this behavioral flim-flam: we’re animals and much of our behavior isn’t determined by our higher cognitive functions, willpower or positive thinking but by biology. Like it or not our physiology isn’t something that we can change, we’re born with it, we have to live with it and, for the most part, we’re not even aware of it. And perhaps it’s this underlying biological determinism that makes market crises so inevitable – and if it is then perhaps they’re not so unpredictable after all.
A perfect example of this was recently unearthed by David Shvartsman at Finance Trends Matter who reminds us what a real bubble looks like. In this case it was InfoSpace in and around the new Millennium. It is worth taking a moment to consider all those investors burned in this and many other bubble stocks.
— David Shvartsman (@FinanceTrends) February 24, 2015
Bubbles matter. They matter because they do a great deal to shape our behaviors. Ben Carlson at A Wealth of Common Sense has a great post up that talks about how market participants are informed, shaped and even haunted by their experiences in the markets. He writes:
As investors we’re all shaped by our experiences, whether we choose to believe it or not. And it’s not only the Depression babies. Investors in the 1970s were scarred from runaway inflation and poor stock and bond market returns. Investors in the 1980s and 1990s were led to believe that stocks offered high double-digit annual returns year in and year out. The 2000s left investors feeling that the markets were nothing more than a casino with the odds heavily stacked against them.
My point in all this is to simply recognize that behind every seemingly irrational market act is a human being. A little humility goes a long way. We all know less than we think. We are all broken in some way with a limited time on this Earth. Life is messy for everyone. So bloggers (and Tweeters) out there cut everyone a little slack and focus on what you can do to make things a little better rather than a little worse.