Why markets are so volatile
These are uncertain economic times, says James Surowiecki in The New Yorker, but “if investors are unsure about tomorrow, why are they acting so certain about today?” Since early July, the S&P 500 has gained or lost at least 2 percent on six days, compared with only two days between late 2003 and late 2006. Without real news to drive many of these wild fluctuations, we can blame “what economists call ‘herding.’” In uncertain times, humans, like animals, herd together for protection. Traders and fund managers buy a stock that is rising, because they assume “that there must be a good reason” for its rise. Paradoxically, studies also show that traders are “chronically overconfident” in their abilities, especially in uncertain times.
Why consumers are depressed
Current economic indicators, such as inflation and unemployment, are relatively positive, says Dan Ariely in the Los Angeles Times, so why are U.S. consumers “so gloomy?” The answer might lie in a psychological condition called “learned helplessness,” caused by “prolonged exposure to unpredictable negative events.” Consumers, in rapid succession, have lived through the Internet stock bubble, the housing bubble, “and now oil prices and the banking crisis.” And these “market disasters” were made worse, psychologically speaking, because of positive expectations set by “financial advisors and the media.” The solution, other than reforming our gossipy business news, lies in policies that will restore some predictability to the market.