Traditional economics assumes that humans make decisions using a controlled cognitive process. That's a fancy way of saying they learn as much as they can, or at least as much as they want, and then use logic to make choices, explains Nell Sloane of Capital Trading Group.
The opinion of many behavioral finance people is that the choices made in today's markets are increasingly the result of gut feel or mood. In other words, not a lot of logic.
Many investors, in fact enough of them to move the market, are over-estimating the accuracy of information and using irrelevant metrics, like how many Twitter users are buying a particular stock, which leads to some odd market behavior that violates traditional rules. This is very dot-com-like, even though the underlying stocks and communication mechanisms are different. It may work out for some. The dot-com frenzy allowed Mark Cuban to put ".com" on his company name and go public. Broadcast.com went up 250% on the day of the IPO, and that same year he sold it to Yahoo! for $5.7 billion. Three years after that it was discontinued.
Logical or not, it made Mark Cuban (the owner of the Dallas Mavericks) extremely rich. I may change the company name to CryptoStop or something. The buying frenzy is creating some funny stories. For example, Tanzanian Gold, which uses the trading symbol TRX, experienced 10X its normal trading because so many people got it confused with a cryptocurrency called Tron, which also uses the abbreviation TRX.
If you are in such a panicked buying mode that you don't slow down enough to see if you're buying the right thing, you should probably pause and take a breath.
Buying into this stock market, or continuing to hold stocks, isn't completely irrational. With 23.6% of all US dollars being created last year and more on the way, asset prices could keep going up simply because dollars are getting diluted. That's just financial physics. Of course, there's always another hand, and on that other hand there are all sorts of proposals that the market probably won't like. Raising corporate taxes, eliminating favorable long-term gain tax treatment, getting rid of the step-up in cost basis when you die, lowering the estate and gift tax exemption. Tax treatment of investments definitely influences investor behavior, so changing the tax treatment would likely change investor behavior. What will get passed, if anything, and how it will affect the markets is anybody's guess, but it's a cloud on the horizon.
By the way, going back to this month's article, there is a counterpoint to the logic that printing gobs of money has a breaking point. The opposite view is called Modern Monetary Theory (MMT), which basically claims that debt doesn't matter for countries that print their own currency. The theory started in 1992, so it's still just a theory, but many people in government really like the idea.
Learn more about Nell Sloane by visiting Capital Trading Group
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