Tuesday, September 02, 2008

Why Traders are more like Consumers than you think

One of my favorite business journalists, James Surowiecki from the The New Yorker, published last week a very insightful piece about the frazzled American Investor and his irrational behavior of trading more in uncertain times than in good times. Surowiecki writes about the increasing volatility on the US Stock market with a lot of days over the last few months where the S&P 500 Index has gone up or down by more than 2%. The main reasons are according to Surowiecki...
  • “Herding” - Investors follow other investors and they seem to do it more in difficult times
  • The dominance of quantitative-trading strategies which explicitly ride the herd effect. These trading models are based on other traders behavior, so if a lot of traders behave similar, than the model follows the overall market movement
  • Investor’s desire to maximize potential gains – every sign of stock market volatility shows a window of opportunity which leads to higher volatility
  • The Job of traders is to trade, so don’t be surprised if self confident traders trade, especially in times of uncertainty.

Surowiecki’s analysis and explanation reminds me again that the jobs of economists and marketers are more similar than most people believe. Both professions are deeply rooted in trying to understand human behavior and their often irrational activities. While marketers are trying to understand consumer’s purchase decision in the times of recession, Wall Street economist are attempting to explain trading behavior in days of irrational stock market performance.

And traders and consumers are more alike than different. Traders and Consumers buy products and services based on all available information and existing emotions, then they keep them, use them, or sell them. All this is a good reason to have more exchange and learning across both disciplines. Marketing departments should definitely hire more economically trained minds. It would be good for our industry.


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