Market evolutions and psychology:
is market efficiency overrated?

As markets are human meeting places,
behavioral biases can distort prices and returns

Markets are dynamical systems, always on the move.

Their evolution might be erratic and distortions are frequent between
price evolutions and available information.
This is a dent in what the EMH / Efficient Market Hypothesis predicts.

This happens because either of structural and technical problems or
of market players' behavioral biases.
Blunders are human, aren't they?


buysell What are markets made of?
And what makes market players tick
and markets run?

Reminder about what markets are used for

On markets, whether organized or not (see below the difference), buyers
and sellers exchange marketgoods, services, assets and also - something
more
personal - their organize work and talents.

Markets are either physical places or - now more and more - electronic
networks.
Don't expect to see the grains themselves in the Corn Exchange.


Those economic exchanges, initially done through gift, barter and conquest,
are nowadays usually done against sous money, the Swiss army knife of
the economy.
With money involved, the interactions between those players determine
prices.
As seen in the stock market example, the transaction price is the
one for which supply is equal to demand.

Markets are open, dynamical,
evolutive systems

Markets are typical network organizations and "open systems", as

* N
odes of economic activities
* Meeting places
(not necessarily physical ones) for economic players.

Unless being overcontroled by dominant entities (states, private
monopolies...),
markets. and among them financial markets, are typical
dynamic dynamical systems. In other words, systems which
components and relations change all the time
.

=>
Therefore their "equilibrium" (maybe not the right word as it
        might suggest a static balance ) is
never fully stable, always
        moving, always adapting (or at least reacting) to situations
.

        Sleep is not an option for markets!

A totally stable and motionless market would be a ...dead market.

So, what fluctuates and evolves in markets ?

The players make things always move
As seen already, buyers and sellers
buysell interact all the time,
even every minute or second in very active markets.

Those people are supposed to decide independently, every one having its
own motivation and doing its own valuation.
But in reality they tend often to behave as a
group  pack, or at least
as clans.

This is a crucial element to define a market.
Those interventions makes the market equilibrium change.
Those evolutions affect volumes, prices and (in financial markets mostly)
returns
.


The kinds of playfields have their importance

Practically
, there are two kind of markets,
  • Organized markets,
They are specialized in standard items (stock exchanges,
forex, large commodity exchanges), usually with frequent
transactions and high exchange volumes.
They are rather transparent and their evolution is publicly
and immediately visible
.
  • Non organized markets,
They are the most widespread ones, but are more difficult
to observe
by outsiders.
They offer non standardized items: real estate, most
consumer goods and services, most equipments, and also
some "other the counter" financial derivatives or "structured"
assets.

There are small price variations (
volatility, more clearly visible in organized
markets usually) and sometimes large evolutions
(cycle-trends).

Are market players rational?
And are market efficient?

What makes those players intervene ?
*** Their motives are various, not always discernable.

        Some are rational.
        Others are not, as under the influence
       
of
behavioral biases
***
What effects have psychological factors
on market situations?


Do transaction volumes and prices always 
* reflect real situations andd prospects
?

* match the available information, as predicted by the "EMH /
   Efficient Market Hypothesis"?

Actually such perfection is rarely reached.
distortasymm Market anomalies
tend to occur rather often.
They are frequent cases in which prices and returns do not match
exactly
the real economic environment.

Those anomalies / distortions range
* from minor mispricings
* to major excesses such as
bubbles and crashes.
Although structural and technical market flaws can be also at
play, individual and collective
behavioral biases are
often the key factors in such "inefficiencies".
See the details in the main article on the topic:
behavioral economics

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M.a.j. / updated : 21 Sept 2015
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