This Week In Finance

"It's a Mad, Mad, Mad, Mad Market"

The title of this tip is taken from the latest issue (May 15th, 2000) of Forbes magazine. According to the article by Scott Woolley, the rush of "the little guy" (i.e., retail investors) back into the market has been a (the?) major contributor to increasing volatility.

The article is more sizzle than steak, but does bring up some things you might find fun discussing with your students.

First, he contends that laboratory experiments suggest the predictable (?) existence of bidding frenzies that begin "for no other reason than that others are buying."

Further, he describes "thought contagion" and the use of the Internet to "spread delusions" about stock values.

Finally, he notes "another market-psych term: recency," which simply means that investor have short attention spans and (as finance behavioralists have been saying for years) that people tend to place greater weight on events that happened recently than events that happened some time ago.

Try passing out this short (two-page) article when you discuss the EMH. Is there really something here? Does the existence of some irrationality imply market inefficiency? Will capital markets researchers and behavioral finance researchers find themselves in the same position as evolutionists and creationists -- screaming at each other and changing no minds? Keep watching!