With all the stock market talk that's now dominating the water-cooler banter in the office, I can't help but think: The stock market is all about expectations of humans.
We look at P/E - which shows what our expectations are of the stocks' future earnings and whether it is "undervalued" or "overvalued". We look at PEG - which also points to an almost similar idea - though it extends it to the future growth prospects of the company.
But at it score, the stock market is where the best - and the worst - of human decision-making comes out. It is based on fear - of the unknown, of failure, of losing money.
Remember the Citigroup downgrade by one analyst? She was right about it, I guess, considering that Citigroup's stocks did suffer a beating. BUT the beating was not just about a single person downgrading or airing her opinions about the stock. It's the reaction of people towards that.
The stock market assumes that we are rational beings when we trade and invest - and that all we want is to get ahead and earn some cash. The last part, they got right. But that we are rational beings? I don't think so.
Perhaps, the best way to play the market is to understand how the crowd reacts to the news that are given them. When some news breaks - the assumption of rationality and completeness of information - seems to get out of the window.
And investors react violently - or vigorously - to those news.
I think psychology, sociology, and social networks have got more to do about stock market movements than the reports that we get from the business papers.
