Explaining Stock Market Volatility: Two (Opposite) Theories

What’s behind gyrating stocks the last two weeks ago or so?

Here are two theories:

One. Age-old human emotion — fickle, fear-and-greed driven human psychology — is the culprit.

In particular, less experienced “retail” investors who chased high-flying tech stocks, and are now freaking out.

Or, late-to-the-party investors who used borrowed money (called, “buying on margin”) to pay for stocks — and now have to put up more cash, or see their positions liquidated.

Two. The volatility is due to a complete lack of human involvement, i.e., trading ‘bots and algorithms are behind the wild market moves.

Having seen variations of this movie many, many times before, I’m guessing that theory #2 is closer to the truth.

That’s because more and more of the supposedly unsophisticated shareholders are now invested in passive, buy-and-hold index funds, which damps down panic buying and selling.

See also, “How Will Rocky Stock Market Affect Housing?“



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