Broker Check

A Simple Explanation

March 17, 2020

Markets are reflective of and report to us on human behavior via their pricing mechanisms. As an old friend, psychology Prof Ed Timmons from LSU once explained to a small group of us, when you take into account the human brain has around 1 billion synapses, when two humans interact, the number of possible outcomes is exponential -- to the tune of 1,000,000,000! That's 1 billion factorem. This means the calculation is 1 billion times 1,000,000,999 then times 1,000,000,998 and so forth. Thus,when you consider the number of participants in the global economy is 6 billion+/-, the number of possible interactions and outcomes on a daily basis is almost infinite.

So how do we simplify and explain this? We have devised a simple formula that expresses how we humans react and interact to the various market forces and surrounding stimuli, both positive and negative. Here are the inputs:

C = Our cognitive mind -- that which we know. We know whatever is occurring will eventually pass and over time
       the trend of the market is always upward.
I =  Our instincts. That which has enabled us to survive as a species. Fight or flight which helped our ancestors to
      elude the sabre toothed tiger and other predators eons ago.
E = Our emotions. Euphoria, fear, love, etc.
M = The media.

So now we have our inputs and here's how we explain what is going on in the market these days (and just about every day for that matter):

C < (I+E)M3

Our cognitive mind is overcome (<) by our instincts (I) plus our emotions (E) multiplied by the media (M) cubed.

This explains how you see precipitous market drops of over 3,000 in points in a day!

Controlling the I+E and ignoring the M is how successful investors succeed over a lifetime! Helping investors to accomplish this is the most important role of an investor coach!

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Frederick C. Taylor
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