Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 9 The Real Economy in the Long Run
Chapter 27 of 36 Basic Tools of Finance
Section 15 of 17
…
Are people who buy and sell in the stock market completely rational?
The efficient markets hypothesis assumes people buying and selling stock rationally process the information they have about a stock's value.
Is the stock market really completely rational?
How much "gut feeling" enjoyable but irrational gambling is going on?
Do stock prices at times deviate from reasonable evaluations of their true value?
...
Economist John Maynard Keynes in the 1930s suggested asset markets are partly driven by the "animal spirits" of investors, irrational waves of optimism and pessimism.
Former Federal Reserve Chairman Alan Greenspan in the 1990s, as the stock market boomed to new heights said it reflected "irrational exuberance."
Stock prices fell in the early 2000s, but whether the exuberance of the 1990s was irrational remains debatable considering the information available at the time.
...
Whenever an asset’s price rises above its fundamental value, it is said to be on a speculative bubble.
Speculative bubbles in the stock market arise in part because the value of a stock to a stockholder depends not just on current profits and dividend payments but also on the expected future stock price.
So, today a person might be willing to pay more than a stock is currently worth if they expect the price to be higher tomorrow.
...
For years online retailer Amazon had no profits but the stock price continually went up.
Amazon is profitable now but still does not pay a dividend, instead re-investing the money to grow the company.
The price/earnings (PE) ratio is the price of a company’s share divided by the earnings (profits) per share.
The average PE ratio for the S&P500 stocks is 19.
The PE ratio for Amazon stock (January 2019) is 346.
The market expects Amazon to be much more profitable in the future.
...
There is much debate among economists about the frequency and magnitude
of departures from rational stock pricing .
Believers in market irrationality correctly point out the stock market often moves in ways hard to explain based on news that seemingly rationally should move it in the opposite direction.
If the market was constantly irrational a rational person should be able to take advantage of the irrationality.
As we have seen, beating the market is nearly impossible, nobody can see into the future.
Sudden market swings are caused by unexpected events, if they were expected stock prices would have already adjusted.
No one ever knows if current stock market share valuations are a bubble or the start of something bigger.
….
rational and irrational
gōri-teki to higōri-teki
合理的と非合理的

Comments

Post a Comment

Popular posts from this blog

Image
  List of U.S. websites China blocks. Google search: Many international news websites, such as the BBC, CNN, the Wall Street Journal, TIME, the Financial Times, Reuters, and the New York Times are banned. Most Western social media apps – including Facebook, X (formerly Twitter), Instagram, Snapchat, Reddit, AO3, Tumblr, and Pinterest – are blocked in China.
Read more
  From article What 10 Years of U.S. Meddling in Ukraine Have Wrought (Spoiler alert: Not democracy). Aaron Mate. April 30, 2024. Section 2. Seeking to capitalize on the unrest in Ukraine in 2013, U.S. figures including State Department official Victoria Nuland, Republican Sen. John McCain, and Democratic Sen. Chris Murphy visited Maidan Square. In a show of support for the movement’s hardline faction, which went beyond supporting the EU trade deal to demand Yanukovych’s ouster, the trio met privately with Tyahnybok and appeared with him on stage. The senators’ mission, Murphy said, was to “bring about a peaceful transition in ukraine.” … The Maidan Movement’s most significant U.S. endorsement came from then-Vice President Joe Biden. “Nothing would have greater impact for securing our interests and the world’s interests in Europe than to see a democratic, prosperous, and independent Ukraine in the region,” Biden said. According to Andrii Telizhenko, a former Ukrainian...
Read more
  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 1 Introduction Chapter 1 of 36 Ten Principles of Economics Section 2 of 14 … Like a household, a society faces many decisions. A society must find a way to decide what jobs will be done and who will do them. It needs some people to grow food, other people to make clothing, and others to design computer software. Once society has allocated people, as well as land, buildings, and machines to various jobs it must also allocate the output of goods (and services) they produce. It must decide who will eat caviar and who will eat potatoes. It must decide who will drive a Ferrari and who will ride the bus. … Because resources are scarce the management of society's resources is important. Scarcity means society has limited resources and cannot produce all the goods people want. Just as each member of a household cannot get everything they want each individual in a society cannot attain the highest standard of l...
Read more