Monday, March 31, 2008

Lemmings falling off the Cliff!

Lemmings are small rodents usually found in the Arctic. They breed very quickly and when their population reaches a certain critical mass, they are known to commit mass suicide by leaping off the cliff. (Although according to Wikipedia, it is proven that this was not the usual behaviour of lemmings but rather something propaganded by media to create sensational news.)

Anyways this strange behaviour of Lemmings excited many social scientists bcos they have found similar behaviour in people living on a small island south of Malaysia. But since there are no cliffs around, these people employ foreign maids and constantly abuse them for pleasure. Some experts believe that overcrowding and the pursue of status and material wealth leads to such inexplicable symptoms.

Ok let's move on to something related to stocks.

As you would have guess, in financial markets, participants exhibit Lemmings' strange behaviour as well by mindlessly following others' irrational actions. In most aspects of normal life, most people behave rationally when looking to buy a car, a fridge, whatever. They collect information, talk to others, get viewpoints but ultimately come up with a decision that is usually rational.

However when it comes to stocks, somehow, independent analysis becomes a taboo. People like to follow what others are doing. When the market is shouting buy, buy, BUY into the peak, they simply react like Lemmings, rushing ahead regardless and then when they see the Cliff, they happily jump over it, just like all the other Lemmings ahead of them who jumped. (Of course participants won't literally see a Cliff until they fell off it as the market tanked.)

Strange huh?

I think this has got to do with greed (and not overcrowding or pursue of status though). For the general public, they seldom come in contact with stocks, investments in their daily lives but in times of bubbles, unscrupulous bankers, brokers, agents will start calling them up and sell them dumb products at the peak of markets. And they get sucked in bcos of the dumb freebies and all. I guess it's also human nature to get easily persuaded by friends (selling insurance policies) or sweet young bankers (selling some dumb structured pdts). So it's difficult to really fault the general public.

Well I guess the lesson learnt from the Lemmings is this: always think on your feet and dont blindly follow the front Lemming (or the sweet young banker leading you) down the cliff. (Which makes me think about the condo called The Cliff, so those staying there are Lemmings of the property market?)