Tuesday, March 11, 2008

Irrationality The Key To Crowd Mentality

All men are fallible. As hard as we try, nothing in this world operates at 100% efficiency. The mind drains as the body exhausts, and decision processes begin to slip. One of debatable issues within game theory contends with the notion that games could end deterministically, given that players take rational courses of action. Here lies the problem. No man or woman can realistically make every single choice at optimal rationality.

Does that mean everybody has gone nuts? Madness remains a subjective term, most of the time I think. The answers may sit along deviations of standpoints regarding payoff measures. The differences in material, emotional, or spiritual desires help make the individuality culture embraced today.

Trying to quantify “estimated” (in other words guessed) potential payoffs of modeled games has not provided much precision in outcome projections. As personal value diverges so much between individuals and cultures, perhaps another approach should be considered.

Why do people do the things they do? As majority of the population does not have scholar backgrounds in applied mathematics, the general crowd probably apply more emotional payoff instead of mathematical means for decision making.

E.g. this observation explains why the stock markets often experience higher volatility, or speed of price movement, in downward slides. As more traders look to sell, diminishing number of buyers or liquidity remains in the markets. Then the sellers panic, lowering price quite easily and willfully to desperately rid of the unwanted shares. Simply put, buyers tend to hold more patience than sellers. This happens again and again in financial history, and suggests that emotional response could occur in a collective fashion.

Emotional sentiments present a limited range of distribution. Then does it not make more sense to quantify only the potential emotive outcomes as it is how most of the population operates? In a practical sense, an investor could find general economic sentiment more important than pure price valuation. This concept probably sits at the heart of most marketing campaigns, and offers the key to underlying human influence.

0 Reflections: