Questions for the economists:
What is the price of risk? Who should manage risk, the Fed or a free and unfettered financial marketplace? Do prices always turn out to be rational? How much risk can the system handle and still function?
Questions for the psychologists:
What is the human cost of risk? Why wouldn’t we act in our own best interest? How can we affect that behavior? Why are some of us risk-seekers, who thrive on risk, while others are safety-seekers, who avoid it?
Why does a trader with a long view suddenly start day trading on the sly?
Have you noticed that every time something happens in the financial marketplace that’s ostensibly irrational, the word “psychology” pops up?
The two major components of the financial markets: fact (economics) and the human component (psychology). We know from behavioral economists that we humans are not always as rational as we would like to consider ourselves. Our behavior is affected by social comparison, personality, how we integrate what we think with what we feel, where our culture’s values fall on the individual-group spectrum, perception, and so much more.
This, the first in a series of questions about just those issues. Help me ask the right ones. And please, let’s all work together to answer the important ones.
Copyright © 2009 Marlin S. Potash. All rights reserved.