We are bored - but the market ain´t
Every time I see an exciting headline, that makes me feel the urge to buy a certain stock I remember the efficient markets hypothesis.
The efficient-market hypothesis (EMH) is well known to anyone studying economics – which I have not btw. Nonetheless, the EMH says that it is impossible to "beat the market" consistently without insider information.
All asset prices always reflect all available information.
All information you or I could gather from anyone has already been priced in.
If any information makes you want to buy a certain asset – you are, by definition, already too late.
But this past year something very peculiar has changed. Many people without much else to do during the pandemic, have turned to the stock market as a form of entertainment. In 2019 only ten percent of all stock market activity could be accounted for by individual investors. This number has since then doubled.
This chart shows all equities and options trading volumes through last week on Robinhood. Things are wild!
It makes sense that asset prices no longer can be called either efficient or based on all information. Matt Levine, a brilliant Bloomberg columnist covering finance, has called this new market the "Everyone´s super bored market" or shorter "Boredom market" (BM).
In the BM investors will actively trade stock to the extent that it’s either fun or there is nothing else fun going on.
This has two major implications:
- If the pandemic ends and people return to their other fun activities – they might lose interest in Robinhood. At that point, they´ll have bought a lot of stocks when that was a great idea and stopped when it became a bad idea.
This could actually be a good thing.
- Imagine you are a corporate CFO. You try to make money from the boredom markets hypothesis. What do you do?
Well, one option would be to put your money into as many weird and fun trendy things as possible and talk about them ALL THE TIME. Sounds familiar?
The average marginal investor is, by no means, an institution putting perfect market information to work. Right now, it is more likely to be a bored 23-year-old putting her or his 600€ to work on Robinhood.
Why do we want what we want?
The second thing I would like to learn more about is Mimetic Theory.
This term was coined by the french historian and polymath René Girard. Mimetic derives from the philosophical concept mimesis, coming from ancient Greek:
Girard thought that human desire was not linear but rather the product of a process in which people imitate others.
“Man is the creature who does not know what to desire, and he turns to others in order to make up his mind. We desire what others desire because we imitate their desires.”
- René Girard
Once you know the theory you start seeing examples everywhere:
Gavin Baker suggests that business travel will come back for the same reason that suits will come back.
Suits follow a cycle. In the late economic cycle, when everything is going great offices tend to go rather casual. Then - the economy rolls over and falls into recession. Someone shows up at the office wearing a suit because they are worried about their job. The next day everyone is wearing a suit. The same goes for business travel.
Tell ten people to get ice cream: If they have to agree on a flavor, they´ll pick chocolate or vanilla almost every time. It’s even possible nobody in the group even likes vanilla or chocolate the most. But Consensus is just another way of saying average and groups don’t agree on what’s cool or interesting.
If our happiness really depended on making material progress - then the ancients must have been a miserable bunch.
We compete for status and don’t really want things - we want to be things (Link).
Seems like we live in a mimetic society, in which right and wrong are largely determined by what others do, can do, and are expected to do. Imitation is the norm.
What I want is barely rational. Therefore decisions are maybe best seen as binary?
Do you want something or not? If you want it - go for it if you can afford it.
If you don’t, you don’t.
The "I want this, but not at this price" is what turns into "if only".