Professor Robert Shiller, Nobel laureate in economics, has carefully examined the close relationship between the sometimes bizarre behavior of financial markets and mass psychology. Apparently the irrational is normal in the world of markets because the masses are always touched a little by the head. One might think that reason works very well in a democracy. In other words, the collective thinks better than the individual. Still, two heads think better than one. But everything seems to indicate that the masses make more mistakes than a teen in love. Why are markets so irrational?
The problem is that the markets are beauty contests in the short term, and collective madness has a huge impact on results. The most popular opinion may not be correct, but it doesn’t matter much. Because the result of the vote is more important than the objective truth. In other words, the most beautiful and interesting girl is not always the one with the crown. The winner of the competition is the one who received more votes from the jury.
However, Why does irrationality persist for so long? How is it possible that markets are so far from reality? People like Robert Shiller, a Yale professor, have spent a lifetime studying this mysterious phenomenon. His book “Irrational Exuberance” (2000) about the dotcom bubble is particularly revealing. And the warnings embodied there proved to be highly prophetic. After the dotcom bubble and before 2008, he mentioned his concerns about the subprime market and the formation of a bubble in the real estate sector. Of course, strangely, nobody heard him.
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In his latest book “Economic Narratives” (2019), Robert Shiller draws us his theories in the context of the post-truth era. I have to admit that I haven’t read the book yet, but I’ve listened to the man in interviews talking about the issues he’s covered in his book.
According to the professor, the masses rely on a collective narrative to define their positions. Interestingly, the validity of the narrative is less relevant than its popularity. For this reason, markets are often victims of deception. People don’t see reality directly, but before they judge, they listen to others. And when everyone thinks the same, it becomes the “truth” of the moment. Then these “truths” go viral and no one can stop them. The herd mentality prevails here.
Usually, the facts are rather rejected or even undervalued due to the FOMO because the collective deception has a dazzling effect on the population.
The narratives that tend to work are not the truest or the wrong. Winner counts are generally the “most consistent”. The world is just too complex and unpredictable. And the human mind cannot endure so much ambiguity and uncertainty. So we turn to the stories. Deep down, we’re still the same kids as ever. Stories calm us down and make the world a better place to live and less scary. Reality overwhelmed. But the stories allow us.
Movies are fiction, but they catch us because they are “believable”. This poetic belief is consistently achieved. In other words, nothing contradicts in the universe of history and everything fits perfectly. Stories create their own laws in their own universe. All actors must participate in the game. And even the laws of physics must submit to the imaginary world that the screenwriter created.
Consistency is what makes conspiracy theories so attractive. Conspiracy theorists have an answer to everything. You build an impenetrable narrative. And they will always be right because they have created their own rules. His theories are proof of everything. They are storytellers and referees at the same time. Nobody will ever beat them in a debate. And that makes them invincible. They stopped being small and vulnerable beings to become giants of “truth”. Now they are special because they have discovered the great world conspiracy. They don’t know what’s going on in their own home, but they know Bill Gates’ secret plans to dominate the world. They are just brilliant and no one deceives them.
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There are no authorities in the aftermath of truth. Nobody trusts anyone. Religion has no answers. Governments don’t give answers. Tradition, science, experts, the media, universities and all authority figures are nonsense. Everything is a big lie. And now the rumor is the only reliable one. Youtube videos, Facebook memes, what influencers say on Twitter, and the opinion of simple and inexperienced men are the new ways of society. Nobody is looking for the source. Because nobody trusts the sources anymore. Any formal source is suspect. And the only credible thing is the rumor, because at least the rumor presents us with a more or less coherent narrative. We can understand it for a few minutes. And thanks to a meme or an improvised documentary, everyone is suddenly an expert.
Back to the comparison of markets with beauty pageants. The rumors go viral. The ugliest girl will be the winner, because the traditional beauty patterns are macho and the ugly and strange is the new “beautiful”. Voting for the most beautiful would almost be sacrilege and would make you a great idiot. With x or with y, the least graceful of all participants received public support and the judges feel the pressure.
Now everyone has a winner in mind and bets start. Who will win? The vote is given and in fact the girl who everyone thought would win wins. The victory of course has profound psychological effects on the event participants. This victory confirmed that her criteria were correct and her judgment correct. After all, they won. And the phenomenon becomes viral because the ideas are self-confirming with every new victory. But the truth is that we are not facing an accurate prediction of reality. We are facing an illusion that has become a self-fulfilling prophecy. That is, a bubble formed and the beauty pageant was won by Betty la Fea.
Now we have a story. The virus was underestimated at the beginning of the year, and then there was growing concern about the signs of a new global economic crisis. The March 23 crash was a direct result of this concern. But after a period of panic, the narrative developed. The Federal Reserve’s vigorous response with its “infinite” impulses penetrated the markets optimistically.
In large part, we owe this to the fact that the charms in 2008 worked like magic and everyone expects the film to be repeated. So the masses are convinced that we are facing a type V crisis and the worst is behind us. This is an election year and the promises of a great future abound. And the increases in recent months confirm that the predictions were correct. Today everyone is a genius on Wall Street.
The problem will arise when Betty la Fea arrives at the Miss Universe pageant and is the last to arrive. That is, disqualified in the first round because it does not meet any of the basic requirements of the competition. I mean, it’s very ugly. He fell while dancing, stuttered at questions, and confused China with South Korea to insult the injury. That is, delusions can be maintained for a while. But sooner or later if they are too far away from reality, reality will prevail. And at that moment the delirium takes on a different shape. It turns into disappointment, anger and panic.
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The market is currently very confident. Indeed, market sentiment indicators point to greed. If this excessive optimism is inflated too much, a new crash could break this trust in a thousand pieces. The blow would be such a product of humiliation that regaining trust could be a long and painful process. This is one of Professor Robert Shiller’s fears. Above all because the impulses could not last forever and the real economy is dying.
However, Bitcoin is strongly correlated with the SP 500. This is very worrying as a new crash would harm Bitcoin. However, this alleged correlation was not a copy. Bitcoin has moved sideways after the recovery from the crash and is technically not on the rise like the SP 500.
On the other hand, there is no greed in the Bitcoin community, but fear. That personally makes it a lot easier for me because it seems to me that we are currently a bit more rational in the Bitcoin market than on Wall Street. Bitcoin is in anticipation. In tense rest. With a little fear. That means we’re frozen with fright. And that’s a healthy response, considering the chaos we’re in. In other words, there is not so much a separation from reality. We have to wait and see what happens. These are very crazy times. And if madness is normal The strings seem crazy.