Why Economists Are WRONG About The Stock Market

Why Economists Are WRONG About The Stock Market
This is a Guest Post by AK of Fallible
AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.

Robert Shiller is not a fan of classical economics. And neither am I. In this video you’ll learn why!

The problem with economics is when it starts to get over complicated with increasingly technical models trying to predict human behavior. The major flaw in these models is the assumption that people are rational. We all know that’s not true! So these models, as complicated and smart sounding as they are, tend to break down because of this assumption.

Because people aren’t rational, and we’re all different, that means we all interpret information differently. That’s why I can look at an earnings report and think it looks great… but the company’s stock price drops anyway. What I thought about the report did not match with what the market thought. There’s a difference in how the information is being interpreted. This is the same reason all the financial media can be crying about the market nearing collapse, but even so it keeps rocketing higher. And that’s what makes a market right? That’s the point of price discovery. Everyone has a different opinion based on their own analysis.

It’s not worth it trying to think like an economist. You’re better of thinking like a psychologist. People are what move markets. And people are irrational. But if you can understand them, you have a much better chance of making money. Booms, busts, cycles, trends — they’re all because of people. So don’t try to model that. Instead try to play the player.

To learn more, make sure you watch the video above!

And as always, stay Fallible out there investors!

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***All content, opinions, and commentary by Fallible is intended for general information and educational purposes only, NOT INVESTMENT ADVICE.