I have always been fascinated by the relationship between economics, markets, and people’s behavior; specifically psychology. I recognized at a very young age the relationship between people’s emotions and the end result…mainly in the markets.
The end result was usually opposite of what people expected and common sense dictated! Herein “lies the rub”, as well as an opportunity.
Following the “HERD”
There have been many studies on people’s mentalities and their resulting actions. This is why I chose, as my major and minor concentrations in university; Marketing, Economics, and Psychology. Trust me, they are most deeply intertwined.
Why are empty restaurants always empty? If you enter a restaurant and you are the first customer, are you comfortable? As written in article, by Ruslan Kogan for dialed, he writes “When you see two cafes side by side, and one is packed with lively people and the other one is empty, which one would you go to for a coffee? Why? Most people will go to the packed cafe. But what if the empty cafe was way cheaper, made better coffee, and was much cleaner? It wouldn’t matter. People naturally want what other people have, and they feel a certain level of comfort from following the choices of others rather than having to think about the situation for themselves”.
Why are carpets in Las Vegas’ Casinos multi-colored with the most obnoxious patterns that can be possibly chosen; even in the finest hotels?
Dave Schwartz, Director of the Center for Gaming Research, at the University of Nevada Las Vegas was interviewed about the subject for the publication wired. Schwartz theories that “Casino carpet is known as an exercise in deliberate bad taste that somehow encourages people to gamble. Others claim it’s in an effort to keep you awake. This is reinforced by the fact that there are no clocks or windows; all in an effort to keep you playing.”
The Markets (and the Slaughter House)
Ever hear about something that is anticipated widely and the opposite happens? Rates are going higher! It’s a done deal! The Dollar will go up, without a doubt because the U.S. is raising the rates and Europe is dropping! If you think the opposite, and tell anyone…they will tell you that your nuts! The market always does this in this month; well 85% of the time…you have to do this! I could go on and on and on.
In my 30 years in the financial sector, I can promise you that in general, the public is usually participating last.
The point is that if you have 100 people in the room who all think the same and 99 of them have already placed their “bet”…then there is no one else to make the price move if it actually happens. This phenomenon is called many things like “already factored in” or “baked into the price”. Regardless, as an investor you must be cognizant of this to survive. Like the “Herd”, this one psychological factor, in my opinion, separates the winners (and the ones who live to fight another day) from the ones who consistently ignore this and are usually led to slaughter.
Turn on CNBC on any given day, or any other news channel for that matter…and it is easy to be influenced by the commentator of the moment. If 10 people think gold is going up, you’d better look at where to sell it. In recent market movement, especially with oil, the “experts are all predicting lower oil now! Where were these guys at $100/barrel oil? I promise you not calling for $25 oil. At $1.08 Euro (to the USD), everyone is calling for parity, or $1.00 Euro. Again…where were they at $1.60?
Am I preaching contrarian investing as a staple strategy? No!
I am simply saying to recognize that people like to do what’s in vogue. They like to follow others. Investing is not easy, however by recognizing certain human traits, you might be able to profit. If you can’t profit…then at least I hope to pull you out of the line and help you not get slaughtered.