Friday, April 13, 2007
Interesting Theory on Stock Market Fluctuations
Nicholas Barberis of the University of Chicago Business School has an interesting article called Search for the Holy Grail: Demystifying the Stock Market. This is clearly written for a general audience. The basic idea seems to be that when the market is up, people feel like they are good investors and that they are playing with the "house's money." So they will keep buying, making the market go up even more. But when things are down, people get pessimistic and want to sell (also because of "loss aversion," the idea that people have a bigger drop in utility from losing a dollar than the gain from finding a dollar). So people sell more quickly since they don't want to lose anything. Then the market goes down even more. So the ups and downs are bigger than you might expect.