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Fear and Hope in the Trading Post

Recently I talked about supply and demand being the levers which controlled price. This is a critical concept to understand because way too many people use previous prices as the gauge for determining future ones. Read that article if you do not understand my logic just yet.
For those of you who have caught up and done your homework, it's time for a second lecture on the subject of speculating. This time we're going to focus on hope and fear.

When hope is high and fear is low, people buy.

When hope is low and fear is high, people sell.

This is similar to supply and demand, but more focused on the reactions people will have regardless of supply versus demand. If everyone believes that a certain item will become worthless, then their fear will be high and their hope low, which leads to selling off the item. It doesn't matter what the supply and demand looks like, at least initially, because people are going to sell off their stocks out of fear.

When fear is high and hope is low, a wise economist will direct his or her attention to the supply and demand of a commodity instead of hope and fear surrounding it. They will think to themselves, "hmmm, supply is getting really high for this item, and demand is practically nothing. But I know that fears will eventually be assuaged, hope will eventually rise, and people will realize that they are panicking just like they always do."

As I like to say on every blog I write, economists should study psychology instead of math. But they all focus on trends and numbers, calculating formulas that will somehow tell them when prices will rise or fall.

No, silly mathmeticians, you cannot measure hope and fear. Eventhough you can predict supply and demand changes to an extent, perceived value of items leads to unmeasurable changes in people's hopes and fears.

Master the art of predicting how others will react and you'll have one more weapon in your arsenal for determining fluctuations in price.

11 comments:

  1. Anonymous said...:

    economists should study psychology as well as maths

    particularly game theory

  1. Anonymous said...:

    Economists STUDY psychology (Behavioural Finance) and game theory (Advanced Microeconomics) already! But you outsmart them all - dont you?

  1. Markco said...:

    Not sure what you're implying there with "but you outsmart them all- dont you?"

    But they should and guess what? I've never taken an economics course in my life. I just go with my gut and do what makes sense.

    That's why I write things in an odd sort of way, without economic jargin, because I don't know any! Hopefully that doesn't come across as bragging, because I do those things to try and teach my ideas to lots of people with different backgrounds and knowledge bases.

  1. Anonymous said...:

    Your text reads like: I know whats going on - economists dont. And even better, you never visited an economics course but you "know" what economists do or do not study and what they look at - interesting.

    After all, I'm not saying that what you write about markets in general is wrong but I dont think that you are in a particularly good position to judge economists. And I dont think that this is the right place to discuss it. Things like that discredit your otherwise good work.

  1. Markco said...:

    I know exactly how markets work in an mmo, but also real life. You really don't need schooling, but good instincts and understanding. I know that now having talked to economic majors who have been impressed by my work.

    I've had three blogs now about mmo-economies, and I have hundreds of emails from people thanking me not for the mmo advice but real life advice!

    Saving gold properly, spending proportionate amounts, diversifying, etc are all ways to improve your real life income and savings!

    But all that being said, I want to learn new things and discuss whatever your issue is with this post. What exactly do you disagree with?

  1. Anonymous said...:

    "economists should study psychology instead of math"

    that's kinda like saying you should buy front tyres for your car instead of back ones. we're not saying don't buy front tyres, or that front tyres are no good. in fact, front tyres are pretty damn good. we're simply saying it's better to buy all 4 tyres.

  1. Markco said...:

    Economists use math to reason and predict trends. But I believe that is why so many of them are wrong most of the time. They come back the next day and say "wow, why did that happen? The numbers showed an upward trend for months and now everyone is selling!" People get lost in the numbers when it's the psychology behind the economy that makes those numbers move the way they do.

  1. Anonymous said...:

    "Economists use math to reason and predict trends."

    that's like saying that people use cars to go to work. yes, that people do use cars to go to work, but they also use cars to go shopping, you go on vacation, to go and visit elderly relatives etc.

    maths isn't just trends and numbers, just like psychology isn't just looking at ink blots.

  1. Markco said...:

    I'm saying that math is not a good way to predict future market trends, but economists and novices use it all the time. Psychology is far better.

    Psychology is a car and math is a horse.

  1. Anonymous said...:

    "I'm saying that math is not a good way to predict future market trends"

    lol there's more to economics than just extrapolating trends

    it seems you're incapable of debating a subject without attacking straw men, so i'm going to take this opportunity to take my leave. for the record, i'm going to continue applying both maths and psychology to economics because i feel that broadening ones understanding of a subject is better than consciously limiting it.

    feel free to continue advising your readers otherwise.


  1. Markco said...:

    The point is not to use math as a crutch for poor decision making.

    I know people that only use math and it causes them to unexpectedly fail. Remember, I wrote this post to teach people a simple concept, not distribute a bible on economics.

    You need only a few basic concepts to make a hundred gold per week in this game. Over thinking an mmo's economy is easy and a waste of time.

    I'm not attacking strawmen, I'm keeping the comments focused on the point of the article.

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