The psychology of crowd: results of academic research

H

harrytrader

Many people seem to think that academic research ignore the psychology of crowd perhaps because of B&S fund failure :D but it is not true. Mimetism have being studied for some years well before this failure.

The precursor is of course Keynes a few years after the crash of 1929. I will not mention him anymore since everybody knows what he said which is now old ideas. After Keynes the economist Kaldor has studied thoroughly the speculation phenomena but I will rather focus on today's studies.

One of the most recent is from Orlean from 1986 to 1994 and it his idea is now a classic in econometry : that is to say mimetism is considered as a rational behavior for an economical agent if this agent doesn't have access to true information. Even experts would adopt mimetism if the information collection process is too costfull. Also under situation of total uncertainty mimetism will become a FUNDAMENTAL behavior.

The mimetism is not irrational because of risk reduction : by imitating the collective behavior, one doesn't have to support great risk about liquidity. This behavior is all the more true that volatility is high.

After saying that he adds than this rationality only concerns the agent as an individual but as collective of agents this behavior is economically irrational when price variation doesn't reflect any new information.

[to be continued]
 
So academic research now recognises that there should be two kind of FUNDAMENTAL values:

- the "ideal" fundamental value of the "homo oeconomicus" which should not be taken in litteral sense but in the same sense than when we say "Humanity". Classical econometry shows that this "ideal" fundamental value should be the discounted value of sum of dividends by the serie of interest rates in the future.

- the "real" fundamental value of the agents on the market which can differ widely from the first one. In reality one can observe that the price of the market differs from the ideal value during a long period and it is only at the end that the market price rejoins the ideal value: it is when it crashes of course (that's why the partisans of the "ideal" fundamental value still claim that the market is "efficient" but others mock them including Mandelbrott (*)).

But that only displaces the question of efficiency: do agents know this real fundamental value :D ? Now guess what: this is a potential link with Technical Analysis. I will develop later.


(*) Translated from french so in bad english Mandelbrott mocks by saying this "According to the datas of Prince Omar Toussoun, the transitional phase of the Nil lasts for at least one thousand years. A transition phase that lasts so long and which nobody knows towards what value it tends should not be qualified as temporary !" :D
 
Well in 1000 years I should be dead so the question wouldn't even touch my brain personally hee hee :D. But if you worry according to Gann Technical Analysis was working during the Pharaon in Egypt for Wheat Price so there is no reason that it shouldn't work any more in 1000 years re :D

Quote from ttrader:

So in a 1000 year tie frame technical analysis is senseeless to You ???


ttrader
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Not so sure even frenchies have some difficulties to understand me :D

Quote from swoop[TR]:

I say we all chip in and get Harry a personal translator, so we can understand his posts ;)
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Quote from harrytrader:

Well in 1000 years I should be dead so the question wouldn't even touch my brain personally hee hee :D. But if you worry according to Gann Technical Analysis was working during the Pharaon in Egypt for Wheat Price so there is no reason that it shouldn't work any more in 1000 years re :D
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Wow. I'd love to chart out points of resistance and support on a 1000 year chart. Of course, we'd have to adjust the prices for not only stock splits and dividends, but also for changes in the currencies used since over 1000 years, many currencies will be phased out.....kind of interesting.
 
Quote from OxonianTrader:



Wow. I'd love to chart out points of resistance and support on a 1000 year chart. Of course, we'd have to adjust the prices for not only stock splits and dividends, but also for changes in the currencies used since over 1000 years, many currencies will be phased out.....kind of interesting.
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GOLD
 
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