Online Stock Trading

When people think of the juxtaposition of words like “rational” and “market”, they often will think of Keynes’ “the market can stay irrational longer than you can stay solvent“ or Greenspan’s “irrational exuberance.” However, the mere discussion of the circumstantial irrationality of the stock market can, so it seems to me, tend to be misleading in one important respect: it might let us briefly believe that the stock market can sometimes be rational.

Mired in your eventual, destined insolvency, you might sadly glance through the grey, joyless, used newspaper only to depressingly discover that those damned stocks of yours finally recovered. In other words, finally, it started being rational, long after your insolvency.

Or, you might be having the time of your life some time, glancing left and right, calculating this, calculating that, measuring the health of this sector, or of that one, and gaily exclaiming to your friends and loved ones that all these unanticipated gains seem to be completely rational. In other words, you might be experiencing completely rational exuberance.

I am going to propose that it is so infrequently rational that we can go ahead and assume that it never is and still be right—that years down Haggard road, when finally, all is good and well, the market is still completely irrational, just as even during times of great, measured, and completely confirmable growth, it is just the same.

In order to more fully examine this, we have to ask the question:

What is rational?

I think it would be safe to say that there are people who believe that the stock market is “rational” because it does what it does. It’s a market place subject to the laws of marketplaces. People who want things will want to pay for them. I think it would also be safe to say, then, that there are people who think the market is being “irrational” when say, a price of a stock does not seem to accurately measure its “real” worth (whatever that means). A pound of rice will always weigh a pound, but a $100 watch might not always sell for a $100; even if it still has the same gold, and is labeled the same brand. But these would seem to contradict each other. That “irrational” bid for that watch, all glimmering gold, would then be “rational” because the market said so.

Honestly, I think both are right, for the sake of argument, but, I think the stock market’s rationality depends on the definition we choose to use. Thus, for the sake of utility alone, I favor only one of them…(more)