Psychology drives economics

If the behaviour of share markets could be summed up in one word it could be this — stampede. Share markets don’t crash. The investors flee. The markets are not as volatile as we are made to believe. The investors are paranoid who start running helter skelter at the drop of the hat. If the nature of share markets has to be understood, the attitudinal dispositions of the investors need to be focussed on. 

A careful analysis of the behaviour of share markets would suggest that they are neither bullish nor bearish. They are cool and tacit tools of manipulation of investor behaviour. The bullish phase is engineered and the bearish phase is doctored. Well, no prizes for guessing who is doing it and why. 

The irony is not that the mindsets of gullible investors are influenced to such a degree that they are forced to act irrationally. The real irony is that the knowledgeable have become a tool for manipulating the poor investors. They act as agony aunts while proclaiming to be omniscient masters of economics. Psychologists have coined a term for this behaviour — awfulising. So even a minor aberration, engineered or mutant, is magnified to appear as a precursor to a major catastrophe. 

The vast majority of small ones who buy this argument say bye to the share markets, while the captain cools are ready to seize the opportunity. Rather they are creators of such opportunities. The scenario is something like this: A business tycoon telephones his secretary that inflation is setting in and share prices are going down. It is a good time to buy. The secretary says bye to the share market and sells her shares to the boss. Share markets are driven by two forces — machinations of the big players and the vacillations of the small. Bulls thrive at the cost of the bears. 

The share market collapse of the recent past is a case in point. The Indian share market came down 1,700 points in one day and Sensex fell to 25,000 points. Nifty fell by 468 points and rupee fell to 66.49 per dollar. Not because anything happened in India but because of the showdown of Chinese economy. 

Investors, according to one estimate, lost to the tune of seven lakh crores. Where did all the money goIJ It could not just vanish in thin air. After all the golden lesson of chemistry is that matter cannot be created or destroyed. This is the real matter. The political economists started writing obituaries of the Chinese economy, caring little about the fact that there are only about nine crore Chinese out of a total population of 136 crore who invest in markets. Naturally the impact of the much touted share market collapse of China would not be as bad as it is made out to be. But the job has been done. 

Talking about economies without talking about Greece will not complete the story. What happened in GreeceIJ Well, the heavens did not fall as was predicted. It was something like the Y2K bug that was feared world over but affected none. This is the real story. The whole business of economics is just about psychology. Two negative emotions to be precise: Greed and fear. Investors would thus do well to take a course in psychology rather than economics before investing. All said and done, dollarisation is not working. 

The writer teaches management at Indian School of Mines, Dhanbad (Jharkhand). He can be reached at ppathak.ism@gmail.com