Online Stock Trading

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So again: On one hand, the market is rational because it’s a market. Markets do special things. Largely, they dictate prices. The process of dictating prices is generally a knowable thing. I’m in the desert for four days and now a gallon of water is the price I place on my very life. A high demand would seem to be a rational explanation for a high price. Defined like this, the market is rational. On the other hand, the market’s sometimes strange valuation of things makes it irrational. Using our analogy: I’m in the desert for fours days, and a man offers me that gallon of water. I reply, “$50 for a gallon of water?! Are you out of your mind? No way am I paying that.” Alternatively, that water offering man, seeing me near death sells it to me for the going urban price of about $1. Defined like this, philanthropy aside, the market is very irrational.

So, as I said before, for the sake of argument, both can be very right. However, for the sake of utility, I suggest that we never acknowledge the first one. As investors, we shouldn’t even care. The fact that the market seems to be rational because it makes sense that demand, supply and price are forces that work on each other, has only academic value. That fact is an abstraction. Like a tool smith selling a hammer, talking about all of the general qualities of the hammer he hopes to sell, the weight, the grip, its composition and so forth: as the worker looking for the tool we need, we have to ask, “But does it work?”

After this little mental exercise of ours, we can see just how we’ve boiled it down: the dictating of prices, as a process, is rational, because it is a process. Processes are rational. This is the scientific view. The prices dictated, however, are not.

Is that correct? Would it be rational for me, four days in the desert, to accept $50 as the price for a gallon of water? It seems, on the surface of things, that that would be a rational choice. What if the price were $50,000? Some would still say that that is rational. After all, I’m placing a value on life, and my own to boot. What about 900 trillion? Placing such a high amount now seems irrational again: there isn’t that much money. So what is the magic number? Somewhere in between the going grocery-store-back-home price and the all-the-money-in-the-world price, there sits the rational price for a gallon of water to a doomed desert traveler. If prices on the fringes are irrational, and prices in between “more rational”, somewhere in there has to be the rational price.

Now look what we’ve just done. We’ve forced a distinction. Now we have to admit that there might be degrees of rationality. If we can say, with seeming certainty, that one price is irrational, and another, seemingly more rational, but maybe not purely rational, we have to label purely rational as one thing, and all other degrees as something other. Doing this, we can replace what comes to mind as “reasonable=rational” with something much more strict. We can have purely rational, and we can have something else. Let’s call this something else irrational, because relative to the purely rational, that’s exactly what it has to be.

So, we know that the process of the stock market seems completely rational. But we don’t any longer care. And it seems that the prices dictated by that process can seem irrational on the fringes and rational to different degrees in between those fringes, but that seeming is dangerous, because once we at first see a price that seems rational (or you might have in mind reasonable), we might later see another more rational, or more reasonable, price, which, when compared to the first price, might now make that first price irrational. We have to keep cutting. The more we do this, the more we approach the magic number of any commodity. Where this will always lead to is something suddenly outside of what we were doing. The rational price of the thirsty man’s gallon of water is no price at all. It can only be, exactly, another gallon of water…(more)