The market is only as smart as the people who participate in it. In the long run, the smarter agents in the system will tend to accrue more wealth than the dumber agents. With this wealth they will be able to move markets and close arbitrage opportunities. However, if an army of barely litterate idiots are given access to complex leveraged financial instruments, free money, and they all decide to “buy the dip”, it doesn’t matter what the underlying value of the stock is. It’s going up.
In the long run, the smarter agents in the system will tend to accrue more wealth than the dumber agents.
Only if the smarter agents also have similar amounts of capital as the dumber agents. As Delong, Shleifer, Summers and Waldman showed, dumb agents can force smart agents out of the market by “irrationally” driving market prices up or down far enough to exhaust the limited capital reserves of the smart agents.
Allow me to present an alternative/additional hypothesis:
https://www.reddit.com/r/wallstreetbets/comments/h0daw4/this_is_the_most_autistic_thing_ive_seen_done_by/
The market is only as smart as the people who participate in it. In the long run, the smarter agents in the system will tend to accrue more wealth than the dumber agents. With this wealth they will be able to move markets and close arbitrage opportunities. However, if an army of barely litterate idiots are given access to complex leveraged financial instruments, free money, and they all decide to “buy the dip”, it doesn’t matter what the underlying value of the stock is. It’s going up.
Not to say that what you’re saying doesn’t apply. It probably exacerbates the problem, and is the main mechanism behind market bubbles. But there are multiple examples of a very public stocks going up or getting a large amount of attention, and then completely unrelated companies with plausible sounding tickers also shooting up in tandem.
This only makes any sense in the world where the market is driven by fools eager to loose all their money or more.
Only if the smarter agents also have similar amounts of capital as the dumber agents. As Delong, Shleifer, Summers and Waldman showed, dumb agents can force smart agents out of the market by “irrationally” driving market prices up or down far enough to exhaust the limited capital reserves of the smart agents.
Related: https://www.bloomberg.com/opinion/articles/2020-06-09/the-bad-stocks-are-the-most-fun Matt Levine calls this the “boredom markets hypothesis”
I’m getting 404 on that link. I think you need to get rid of the period.
Thanks, edited.