Australian Equities

Human behaviour – herd mentality, panic and risk

01/04/2009

Martin Conlon

Martin Conlon

Head of Australian Equities

I couldn’t go past the title of Bjork’s 1993 hit in capturing the essence of market conditions at present.  Not only do the lyrics capture some of the animal spirits influencing investor behaviour, she was also one of Iceland’s few music success stories, an economy providing more lessons than most in the pitfalls of herd mentality, panic and how not to manage risk.  Over the last decade or so, Iceland’s 300,000 people have had the lot: stock market booms, housing booms and massive economic expansion, culminating in its citizens having the highest GDP per capita in the world.  Its risk-taking Viking descendants partied hard, and Iceland’s banks managed to accumulate assets equivalent to around 9 times its GDP.  As with much of the world currently, the party hasn’t ended well and there are some Viking sized hangovers.  As Bjork’s lyrics point out: 

If you ever get close to a human
and human behaviour
be ready to get confused

there's definitely no logic
to human behaviour
but yet so irresistible
 

they're terribly moody
then all of a sudden turn happy
but, oh, to get involved in the exchange
of human emotions is ever so satisfying

A cursory glance at the newspaper at present finds column after column of analysis on the mistakes made of recent years and the rationale behind them.  Most of us are true experts in hindsight.   Investors are busy reacting sharply to the wealth decimation which has followed an extended period of easy money and panic is the order of the day.  As Bjork noted, investors are terribly moody, then all of a sudden turn happy.  March finally saw a few investors turn happy.  Most financial market participants describe this moody behaviour as volatility, probably because it sounds more impressive and is conducive to the extraction of a greater fee for its control, a strategy mastered by the pharmaceutical industry, whose participants would never be so daft as to name a drug “Calming Pills” (what self respecting doctor could charge patients a significant fee for prescribing those!).  Methasydrohexadodryl would surely command a greater premium.

Humans are, and are likely to remain moody.   I have no idea how to predict human behaviour, however, with the knowledge that it is impacting significantly on financial markets at present, and that like Iceland, it may at times move to extremes, I thought it may be worth trying to assess a couple of currently topical issues and the impact which some decidedly moody behaviour may be having on them.  

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