Saturday, April 12, 2008

Markets NEVER Behave Rationally

Markets NEVER Behave Rationally

"The markets are acting irrationally."

Well of course they are. Markets never behave rationally - never. How can markets be rational when humans create markets and humans are irrational? Market prices are based on an expected future based on assumptions that are always flawed because the future cannot be forecasted. The best that can be said is that there are "degrees" of rationality in the market.

Some people seem to think that prices are event driven. In other words, economic releases and news events are always what cause prices to move the way they do. In actuality, the people who believe this are wrong.

For instance, if IBM were to report better-than-expected earnings, its share price will go up, right?

Not necessarily. Its share price may go up, but it also may go down!

The price action depends on how the players trading shares of IBM feel about the current earnings report, future earnings forecasts, current market environment, their personal financial situations and so on and so forth.

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