Monday, February 18, 2008

market and human sentiments: getting a gift on time or a bit late?

one of the major theories in the market is the boom-bust cycle. the economy is doing well. stocks are rallying high. investors are making a lot of money. then the slowdown begins, with stocks taking a hit and investor confidence slowly and steadily eroding.thats usually when the central bank steps up its game to save investors - by either pumping in money into the market or cutting interest rates. this sustains confidence for a while, before the market again goes down. or sometimes, the slowdown is actually 'slowed down'. so what the central bank actually does is to 'sustain' the boom period for as long as it can before it goes out of its control.

now i would like to draw a parallel to our day-to-day lives. our birthday. a day when everybody around us makes us feel special. it includes the ultimate competition of people calling you at midnight to be the first to wish. and your close ones trying to make the entire day special and full of surprises (for the lucky few!!). then the day is over. u lived the best day of your life in a year and probably felt the most special. one, this day of yours appeals to everydbody - wife, kids, family, friends, colleagues, etc. unlike a mother's day or father's day. we could compare it to an absolute state of market boom. everybody is happy and in turn makes u feel happy and special. the next day you still feel a bit special, but not as much as the previous day! say some of your friends wished you a few days later (yeah! happens a lot i know), you feel a bit special that day. but nothing compares to the day of your birthday.

think about this scenario - your friends and family plan it in a way that they surprise you for a month after your birthday. like make it the 'birthday month of ravi' or something. it might dilute how special you might feel but still sustain some interest. even the constitutents (family, friends, etc) might not be as enthusiastic about your birthday. this is pretty much like the central bank cutting interest rates to sustain the economy or get it back to normal. it just wont help as long as people are not confident or enthusiastic about the economy. its in the mindset, not in the rate cuts, atleast not as much as many think! and its pretty normal for the market to act that way. afterall the market is guided by human emotions.

it opens a pandora box in my head...with a lot of questions.

why do we like surprises? what can we learn about relationships, from economic theory and market cycles? how do we encourage shopping behavior?

i will cover this the next time when am not blogging from work :-)

personally, i love my best gifts (the ones from the closest people) a bit late, thats if they choose to give me one :-)

3 Comments:

At 2/18/2008 02:49:00 AM, Blogger Karuna said...

1. satisfaction = what you get - what you expect. So surprises are good since you expect less or not at all.
2. stock market booms are when stocks are overvalued due to sentiments in a bull run.
3. you b'day idea sounds like 2 things. one to increase the number of days when u r made special at the cost of decreasing the intensity of each day. its not clear which will improve your happiness over a period of time. it also sounds like smooothing or mortization of wishes over a period of time instead of a spike at one point.
also there is some theory (google luis rayo uchicago for this paper) that we all have some long run level of happiness. we might get dislodged higher or lower from it based on an external input, but once we internalize it, we will slowly go back to original state. eg getting a new car will excite u for a while till uget used to it.
so it might be that for us to be constantly excited we need periodic booster shots of new things like buying stuff to push us out higher than the lon-run level of happiness. maybe thats the modern way of consumerism for one. so this change to bday wishes would hv to surprise you each year with a different model each yr.
5. anyway the stock market stylization is not complete or corect -- it ismixed up with real business cycle. i dont get the comparison to b'day. anyway rates are cut to provide liquidity as well as to spur consumer purchases.

 
At 2/18/2008 04:14:00 AM, Anonymous Mahesh said...

1. "satisfaction = what you get - what you expect. So surprises are good since you expect less or not at all."

the fact is you expect a few surprises on your birthday anyway. the post is not about those surprises, but what if it lasts longer or comes a bit later. and most importantly, taking away the assumption that all people feel the most happy when they get a gift on their birthday. well, for a start i dont, which i mentioned towards the end.

2. "stock market booms are when stocks are overvalued due to sentiments in a bull run."

i think its interesting to understand the timeline comparison. the boom-bust cycle to until a few months into your new year, after which you even forget about it. at the end of the day, it comes down to sentiments which is pretty much what i said..."afterall the market is guided by human emotions."

3. you b'day idea sounds like 2 things. one to increase the number of days when u r made special at the cost of decreasing the intensity of each day. its not clear which will improve your happiness over a period of time."

ok compare this to shopping behavior. most shops discount around the same time of the year hoping people would buy a lot. and during the rest of the year, there isn't much in terms of discount. this is under the assumption that 'everbody' tends to shop at the same time JUST because there is widespread discounts. am saying, discounts spread out through the year would yield better results (and i dont remember the research which actually proved it)

"it also sounds like smooothing or mortization of wishes over a period of time instead of a spike at one point. also there is some theory (google luis rayo uchicago for this paper) that we all have some long run level of happiness. we might get dislodged higher or lower from it based on an external input, but once we internalize it, we will slowly go back to original state. eg getting a new car will excite u for a while till uget used to it. so it might be that for us to be constantly excited we need periodic booster shots of new things like buying stuff to push us out higher than the lon-run level of happiness. maybe thats the modern way of consumerism for one. so this change to bday wishes would hv to surprise you each year with a different model each yr."

am talking about external surprises, which you do not pay for. nor expect. its not the same as a planned purchase of a car which is what you are refering to. your periodic boosters come as wedding anniversaries, salary appraisals, etc. i just took the case of birthdays cuz its universal for individuals.

5. anyway the stock market stylization is not complete or corect -- it ismixed up with real business cycle. i dont get the comparison to b'day. anyway rates are cut to provide liquidity as well as to spur consumer purchases."

am not an expert on economics so i could ve surely confused with stock markets and biz cycles. the simple comparison was between how stocks/customer confidence/etc peak sometimes and then slowdown. and how the central bank/shops/etc cut rates or provide discounts to customers to feel confident. the comparison to 'extended birthdays is just a way of saying that as much as u extend it will eventually slowdown. even a recession when external parameters dont help (war, trade deficit, dollar depreciation, etc).

except the fact that you dont see the connection between birthdays and the market, am not exactly sure what the contention is about.

cheers

 
At 2/18/2008 04:14:00 AM, Anonymous Hesh said...

1. "satisfaction = what you get - what you expect. So surprises are good since you expect less or not at all."

the fact is you expect a few surprises on your birthday anyway. the post is not about those surprises, but what if it lasts longer or comes a bit later. and most importantly, taking away the assumption that all people feel the most happy when they get a gift on their birthday. well, for a start i dont, which i mentioned towards the end.

2. "stock market booms are when stocks are overvalued due to sentiments in a bull run."

i think its interesting to understand the timeline comparison. the boom-bust cycle to until a few months into your new year, after which you even forget about it. at the end of the day, it comes down to sentiments which is pretty much what i said..."afterall the market is guided by human emotions."

3. you b'day idea sounds like 2 things. one to increase the number of days when u r made special at the cost of decreasing the intensity of each day. its not clear which will improve your happiness over a period of time."

ok compare this to shopping behavior. most shops discount around the same time of the year hoping people would buy a lot. and during the rest of the year, there isn't much in terms of discount. this is under the assumption that 'everbody' tends to shop at the same time JUST because there is widespread discounts. am saying, discounts spread out through the year would yield better results (and i dont remember the research which actually proved it)

"it also sounds like smooothing or mortization of wishes over a period of time instead of a spike at one point. also there is some theory (google luis rayo uchicago for this paper) that we all have some long run level of happiness. we might get dislodged higher or lower from it based on an external input, but once we internalize it, we will slowly go back to original state. eg getting a new car will excite u for a while till uget used to it. so it might be that for us to be constantly excited we need periodic booster shots of new things like buying stuff to push us out higher than the lon-run level of happiness. maybe thats the modern way of consumerism for one. so this change to bday wishes would hv to surprise you each year with a different model each yr."

am talking about external surprises, which you do not pay for. nor expect. its not the same as a planned purchase of a car which is what you are refering to. your periodic boosters come as wedding anniversaries, salary appraisals, etc. i just took the case of birthdays cuz its universal for individuals.

5. anyway the stock market stylization is not complete or corect -- it ismixed up with real business cycle. i dont get the comparison to b'day. anyway rates are cut to provide liquidity as well as to spur consumer purchases."

am not an expert on economics so i could ve surely confused with stock markets and biz cycles. the simple comparison was between how stocks/customer confidence/etc peak sometimes and then slowdown. and how the central bank/shops/etc cut rates or provide discounts to customers to feel confident. the comparison to 'extended birthdays is just a way of saying that as much as u extend it will eventually slowdown. even a recession when external parameters dont help (war, trade deficit, dollar depreciation, etc).

except the fact that you dont see the connection between birthdays and the market, am not exactly sure what the contention is about.

cheers

 

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