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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.