A great post (and quote) brought to our attention by Ben Jones’ The Housing Bubble 2 this afternoon. First the quote:
‘I can calculate the motions of heavenly bodies, but not the madness of people.’ (Sir Issac Newton having lost his shirt in the South Sea bubble, 1721)
And now a couple of choice excerpts from the post on Elliott Wave International:
It is universally presumed that the primary law of economics, i.e., that price is a function of supply and demand, also rules finance. However, human behavior with respect to prices of investments is, in a crucial way, the opposite of that with respect to prices of goods and services.
When the price of a good or service rises, fewer people buy it, and when its price falls, more people buy it. This response allows pricing to keep supply and demand in balance. In contrast, when the price of an investment rises, more people buy it, and when its price falls, fewer people buy it.
Attempting to apply the law of supply and demand to investment markets is akin to attempting to apply the laws of physics to falling in love. They do not pertain.
Rather than become excited to buy as prices fall, as consumers of goods and services do, investors become excited to buy as prices rise. Since desire and hope are entirely on the side of price rise, only fear and despair can be on the side of price decline.
· Home Sales: Financial vs. Economic Behavior [Elliott Wave]