The psychology of markets and the power of rumours

The history of financial markets is closely linked to human nature and its emotional dependencies. In the early modern period, resourceful traders in the Netherlands developed completely new methods of trading goods and promises. This era laid the foundation for behavior that continues to shape people’s economic decisions today.waving, the masses often lose their sense of the real evaluation of things. A look at these past events shows how quickly reason is replaced by collective tumult.

The invention of modern trading instruments

Long ago, the Dutch traders established a central place for the exchange of securities. Even then, they used a variety of tools to bet on events in the distant future. You could take out loans to artificially increase your own profits. Likewise, contracts have been concluded that allow the purchase or sale at a later date at a fixedPrice. Almost every conceivable combination of possible future events could be converted into sounding coin in this thriving trading city.

The Frenzy of Easy Money

More and more wealth sought this place as a safe haven and melting pot of possibilities. As a result, interest rates on loans fell, while prices for land climbed steadily. Even shares in companies that did not yield any profits saw a jump in value. The locals called this strange hustle and bustle a trade with the fresh wind.became invisible, and because this air trading brought enormous book profits, the general prosperity grew. As a result, people’s willingness to take high risks continued to increase.

The contagion of success stories

Within a few years, the shares of the large overseas trading company rose sharply. The general level of securities climbed from a low level to a much higher target. All available markets recorded huge gains for the early participants at the time. Merchants who had become rich with houses now put their excess coins in these papers. Oftenmade the worst financial decisions exactly at what seemed like the best times.

The power of social contagion

Exuberance and recklessness ruled everyday life, and each new high triggered further gossip. Stories of sudden wealth moved more and more people to get involved in this endlessly rising market. Getting rich has never been easier, and wealthy people were eager to tell others about their success. Such rumors are hard to beat, because they canboth harmless and highly dangerous. We humans are by nature social beings who react strongly to the opinions of their fellow human beings. To this day, we completely underestimate the influence of such whispering posts in the economy.

The economics of rumor mill

When the crowd is incited by rumors and the fear of missing out, fatal dynamics arise. The economic cycle is nothing more than the collective expression of our nature, which constantly oscillates between hope and despair. We become frivolous together, and we become depressed together. This joint action is the real key toUnderstanding the markets. You could call this the economy of rumor mill to explain how prices react to new information. We share this information and infect others with our own mood.

The Misconception of Rational Man

The classic doctrine assumes that people act completely rationally and free of emotions when making money decisions. But have you ever met such a completely insensitive person? It is foolish to think of man as a flawless being, ignoring the importance of our moods. Financial patterns repeat themselves throughout history inrecurring cycles of bloom and crisis. This is mainly because money is a deeply social phenomenon.

Speculation as a social event

Speculation is probably the most social form of money handling. It brings together people who might otherwise never get to know each other. They then have nothing in common except the one goal of accumulating a lot of wealth in a short time. When we get excited about quick wins, we prefer to swim with the current rather than against it. Most of us behave like alarge, blindly following herd.

The Failure of Classical Textbooks

In the masses, the supposedly iron laws of economics get completely confused. The old doctrine claims that when prices go up, demand goes down. But when prices climb for certain values, their owners feel rich and talk about it. A potential buyer will panic at such rising prices. He thinks today’s price is aBargain, and buy immediately, for fear of further increases.

The illusion of balance

Such price increases lead to even more price increases and boost demand. In reality, one of the fundamental laws of economics ultimately proves to be a pure fantasy. Another law states that as prices rise, so does supply. But in a growing market, a potential person sometimes thinks very differently.with prices climbing, it would be crazy to sell now when she could only do it next year. She shares this observation with her friends, and everyone is waiting for a better win tomorrow.

Price as an emotional signal

Rising prices therefore do not always lead to an increase in supply, but can even cause it to shrink. As a result, everything on the way from the great tumult to the bitter break-in is pushed even further up. Classical theory teaches us that price is a mechanical instrument for a stable equilibrium. Only pure theorists think in such sterile models. Inof the real world, climbing prices seem like a strong sense of seduction. They show us the possible profit on paper and lure us into the markets.

The True Nature of Assessment

This behavior tempts us to bet on the future, which is the exact opposite of stability. For the scholars at the universities, the price is just a cold number on a piece of paper. For real people, on the other hand, this price is a deep feeling and a benchmark for their own hopes. History shows us again and again how quickly these feelings prevail overgain reason. As long as we are guided by these feelings, the old patterns of greed and fear will remain.