Broker Check

A Simple Explanation

March 17, 2020
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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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