Market prices

Market prices : Do non-economic factors affect market prices?  There are a couple very large examples in the last 100 years that prove the human emotion and in particular fear or ambiguity aversion can affect the market and be very economically meaningful.  The first is the stock market crash of 1929.  Though driven by economic factors, the stock market was inflated exceeding fundamental values, debt was high among investors, many were invested in the market and using debt/margin to pay for their investments. :Business and Finance Homework Help

Then as investors became fearful and began to pull out of the market, it caused the crash of 1929, (History.com Editors).
Two non-economic factors helped precipitate the crash and those were over-confidence and ambiguity aversion. Over-confidence in the economy and the market drove investors to exceed their debt limits which drove volume into the market and inflated prices.  While some of this may not have been driven by self-attribution, it was the role of many unsophisticated investors which helped drive prices above cash-flow values.  The after effect of the run on banks and massive sell-off of shares was driven by the uncertainty or ambiguity aversion.  If we look at A Survey of Behavioral Finance, Barberis and Thaler explain that “people do not like situations where they are uncertain about the probability of distribution of a gamble.”  Here, many unsophisticated investors were in the market and I would speculate that this was a gamble for most.  They essentially followed the herd which lead to an emotion driven market and uncertainty of the future which caused everyone to try to get out as soon as they could.
The second example is the market crash in March 2020.  Here again, as the COVID virus spread around the globe, investors became nervous as factories and stores were closing temporarily and workers were being sent home to quarantine.  These events set up a shutdown of economic activity which triggered panic due to the potential consequences.  This led to the three worst point drops in US History, (Frazier, L. 2021). 

Don't use plagiarized sources. Get Your Custom Essay on
Market prices
Just from $13/Page
Order Essay

Again, fear driven selling helped drive the market lower as “…speculation about how bad it could get created even more fear among investors, (Frazier, L., 2021).  As the government intervened, in April investors began to reinvest and by year end, the market had grown.  Frazier again highlights the subject topic best as she says, “While there was (and still continues to be) a very real economic, financial and health crisis globally, market fluctuations aren’t based solely on economic factors. The economy is a major factor, but panic plays just as equal a role in stock market volatility.”  Fear, regret, and aversion of the unknown have a major impact on the market just as optimism, and confidence do.  These two events are two among many where non-economic factors have very meaningful economic results.
It’s hard to say that these two events were driven by “human mistakes” as I believe the other obvious circumstances drove investor emotion.  But in both cases, you can see where “human mistakes” or human engagement in the market aggravated both situations.  Had the human element been eliminated in both situations, I don’t believe the bias could still exist.  In the case of the 1920’s, if we remove human bias and involvement in the market, then prices would stay at fundamental values.  In other words, the market wouldn’t have been overbought.  Similarly, in 2020 the virus drove fear which created a major sell-off and then government intervention created a rebound buying opportunity.  In 2020, I think values would drop without human intervention because of the economic slowdown, but the peaks and valleys would not have been as pronounced if we removed the human emotion around this event.

Response 2:
Non-economic factors are interesting to think about in terms of there effects on market price. From historic research one may be influenced to believe that there is sufficient information to prove that human biases can affect the market and be economically meaningful. Let’s take into example local biases. Investors seem to invest less in companies that are in their home state when their home state is undergoing or portraying some recession indicators, such as high unemployment or weakened housing collateral. During times of local recession, consumption smoothing becomes more difficult and risk sharing levels decline, leading to regional variation in risk aversion and predictable patters in return. Since investors are now less likely to invest in their local companies the local companies become undervalued leading to the ability to purchase shares at a significant discount and the opportunity to have a significant gain. Proving one bias that directly affects market prices.
I think human mistakes aggregate and influence financial markets. Humans can be predictable and unless managed and made aware of their own biases, will not change their behaviors leading to an arbitrage opportunity for sophisticated investors. Overconfidence biases make investors overbuy or oversell investments driving high volatility in the markets, one can be able to predict when overconfidence biases will be present, such as when there is local economic instability or when there is a new political party coming into office. If one can learn when these biases will be present one can exploit the opportunities and figure out patterns that influence financial markets. In today’s time one also has to factor in computerized trading or high frequency trading (HFT). These types of trading strategies help exploit these human mistakes in matters or milliseconds. If the whole financial market were to turn to computerized trading, I don’t believe it will eliminate the importance of biases in the world. These algorithms are created to exploit small opportunities that arise, without biases in the market the computerized traders would not be able to have as significant gains as they would when human mistake is present. Not only that but one could figure out these algorithms and exploit the weaknesses that they portray. I think that just like with human mistake, computers can also exhibit patterns of mistakes. Yes, computer trading would eliminate some biases such as local biases or overconfidence, but it would just arise a new set of biases that can be studied and exploited. Finding exploitable opportunities bases on biases is all about finding patterns in the market that correlate to a specific combination. Local biases, presidential puzzles, and investor sophistication are all studied patterns from humans that continue to arise over time. The same things will be done if one has a market of just computerized trading. Computers work on algorithms, which are basically just patters coded into the computerized program. Although it can be adjusted and quickly changed, patterns will be developed, and people will be able to figure them out to formulate new biases.
In summary, I think that yes computerized trading would eliminate human biases in the market, but they would just be the beginning of new studies and new forms of biases will arise.

 

Calculate your paper price
Pages (550 words)
Approximate price: -

Why Choose Us

Quality Papers

At Acme Writers, we always aim at 100% customer satisfaction. As such, we never compromise o the quality of our homework services. Our homework helpers ensure that they craft each paper carefully to match the requirements of the instruction form.

Professional Academic Writers

With Acme Writers, every student is guaranteed high-quality, professionally written papers. We ensure that we hire individuals with high academic qualifications who can maintain our quality policy. These writers undergo further training to sharpen their writing skills, making them more competent in writing academic papers.

Affordable Prices

Our company maintains a fair pricing system for all academic writing services to ensure affordability. Our pricing system generates quotations based on the properties of individual papers.

On-Time delivery

Acme Writers guarantees all students of swift delivery of papers. We understand that time is an essential factor in the academic world. Therefore, we ensure that we deliver the paper on or before the agreed date to give students ample time for reviewing.

100% Originality

Acme Writers maintains a zero-plagiarism policy in all papers. As such, Acme Writers professional academic writers ensure that they use the students’ instructions to deliver plagiarism-free papers. We are very keen on avoiding any chance of similarities with previous papers.

Customer Support 24/7

Our customer support works around the clock to provide students with assistance or guidance at any time of the day. Students can always communicate with us through our live chat system or our email and receive instant responses. Feel free to contact us via the Chat window or support email: support@Acme Writers.

Try it now!

Calculate the price of your order

You will get a personal manager and a discount.
We'll send you the first draft for approval by at
Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Samples

Our writers complete papers strictly according to your instructions and needs, no matter what university, college, or high school you study in.

Categories
All samples
Analysis (any type)
Argumentative essays
Dissertation/Dissertation chapter
Analysis (any type)
Advantages and disadvantages of lowering the voting age to thirteen
Undergrad. (yrs 1-2)
Political science
4
View this sample
Argumentative essays
Is euthanasia ethical or not?
Undergrad. (yrs 3-4)
Nursing
3
View this sample
Dissertation/Dissertation chapter
Videoconferencing as a teaching tool
Undergrad. (yrs 3-4)
Education
10
View this sample

Our Homework Writing Services

Acme Writers holds a reputation for being a platform that provides high-quality homework writing services. All you need to do is provide us with all the necessary requirements of the paper and wait for quality results.

Essays

Essay Writing Services

At Acme Writers, we have highly qualified academic gurus who will offer great assistance towards completing your essays. Our homework writing service providers are well-versed with all the aspects of developing high-quality and relevant essays.

Admissions

Admission and Business Papers

With Acme Writers, we will help you secure a position at your desired institution. Our essay writing services include the crafting of admissions papers. We will still help you climb your career ladder by helping you write the official papers that will help you secure a job. We will guide you on how to write an outstanding portfolio or resume.

Editing

Editing and Proofreading

Acme Writers has a professional editorial team that will help you organize your paper, paraphrase it, and eliminate any possible mistakes. Also, we will help you check on plagiarism to ensure that your final paper posses quality and originality.

Coursework

Technical papers

Acme Writers harbors professional academic writers from diverse academic disciplines. As such, we can develop homework writing services in all academic areas. The simplicity or complexity of the paper does not affect the quality of homework writing services.