the new investor
J
ust the other day I was sitting in
my Economics tut listening to
Dan Linegar ramble on. Ok, he
quite eloquently rambled on
to the next economics model
and then the rather controversial
Tokologo Phetla raised his hand.
We all knew this meant another long
and philosophical question, but that
day he raised a very important point:
“Why do we study all these models in
economics when what really influences
economics is the way people act? Surely
we should just study people and human
emotion?” Dan, a little ruffled after his
beloved Economics had come under
attack, set out to answer this question.
He suggested that although Economics
was shaped by the way people acted,
he reiterated that economic models
were used to simplify reality and help
economists make decisions. He did,
however, allow Tokologo the privilege of
agreeing that more time should be spent
learning how people make decisions.
By analogy, think of how financial
markets work and how the prices of
companies in the stock market fluctuate
as a consequence of human behaviour
more than anything else. How else can one
explain the years leading up to 2000 where
the prices of Internet-related companies
soared through the roof, even though
a large majority of the companies were
losing money? Why is it that the prices of
South African stocks precipitated during
the Financial Crisis in 2008? One would
have expected the share prices to have
dropped because of the exposure of
some companies to the US and European
markets, but the actual speed at which
they fell surely had to have arisen more
from just the technical and fundamental
analysis that usually precedes an
investment decision.
The way people make their decisions
has a lot to do with the way they feel.
Emotions – such as greed and excitement
– can push the price of companies up
Money
and
By Jack Newby
Em