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January 16, 2008



No the reason is subtler than that. People overestimate their own abilities. They think they are smarter than other people and that other people won't forsee changes in GDP. Of course this becomes self-fulfilling.


There is also the issue of people putting more trust into the accuracy of economic data than they should. I would however point to rational maximization of utility as a significant contributing factor to this phenomenon.

People will continue doing the things that make them happy for as long as possible, much like a teenage party at a friend's house going on right up until the last minute before the parents come home. In the stock market, the fun lasts until someone starts actually cutting their dividends, instead of just talking about it.

Like teenagers again, no one minds so much when that odd one in the corner does it, but they freak out when it's the football hero.

Speaking of correlations between equities and the economy - see the following link for a neat one!



.. which is why the best investors are contrarian - the property stocks all shot up yesterday, just when it was announced how bad commercial property had been over the last year


I guess that investors should "anchor their expectations" like the Fed proposes for inflation. See Figure 15 at the bottom of my text. It shows no possibility of any investor to really drive the stock market in the long run
http://inflationusa.blogspot.com/2007/08/exact-prediction-of-sp500-at-various.html .
The future of aggregate stock market indices (as well as economies expressed in monetary units) is very well predetermined.


Wonderful timing. How do you explain 21.01.2008?

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