The herd instinct

Heavy trading in exchange-traded funds means more stocks are likely to move in the same direction on any given day. Analysts call that correlation, a mathematical term meaning similarity of behavior. Correlation is on the rise, to the frustration of investors who are trying to analyze stocks based on their underlying strengths and weaknesses. […]

[Since] mid-June, the correlation had jumped back above 70%, as investors stopped looking for winners and just sold broadly. Last week it surpassed its 2008 high of 79% and hit 81%, the highest level since the 1987 crash, when it touched 83% for one day. That means that on most days recently, the great majority of stocks in the S&P 500 were moving in the same direction, up or down.

Correlation typically goes up during volatile periods … — “The Herd Instinct Takes Over,” Wall Street Journal, July 12, 2010

[F]inancialization depends on mimetic rationality, a kind of herd behavior based on the information deficit of individual investors. […]

I may be absolutely certain that there is no danger of inflation, but if the Chairman of the Federal Reserve says, for example, that the labor market is stretched thin, it is clear that I will adapt myself to this ‘prophecy’ (‘wages will rise and therefore prices will also rise’). If I don’t want my stocks to lose value, I respond to Greenspan’s declaration by selling as soon as possible because, certainly, everyone, sure that Greenspan is going to raise the interest rate, will do likewise (‘everyone’ except skeptics who speculate on the marginal fluctuations around conventionally predictable trends, and the contrarians, who speculate against the market, against the conventional wisdom, and who consequently are the most dangerous).Capital and Language, Christian Marazzi

I like the prospect of a securities-market crash. A bunch of investors losing a bunch of money always makes me happy. But that’s not the only reason I put these quotes up. I’ve just started reading Marazzi’s book, so I don’t have much to say about it so far, but having read these quotes within hours of each other, the difference between the two sources is noticeable. For Marazzi, the herd, which is to say the consensus of public opinion, determines both the value and movement of securities. It is in everyone’s interest, then, to either move slightly ahead of or in concert with the rest of the herd. The dissenters are relegated to a parenthetical reference and are “dangerous” to market health. For Marazzi, then, financial markets in the neoliberal/new economy era are determined by the average of the herd.

The Wall Street Journal, on the other hand, with historical precedence as its guide, sees moments of increasing consensus as a sign of unhealthy markets that are moving toward collapse. A consequence of this reason is that dissenters are neither parenthetical nor dangerous but necessary. High numbers of skeptics and the contrarians are both an indicator of robust markets and, more actively, act as a brake on the fevered speculations that seem to drive herds that grow too large. They, not the herd, make equilibrium possible.

I’m not sure I really have a conclusion here, other than that Marazzi’s theory of financial markets perhaps focuses too much on the herds and not enough on dissent. Capitalists have also discovered that exodus is regenerative.

2 thoughts on “The herd instinct

  1. Funny, I’m reading Massumi’s Parables for the Virtual right now which is dealing with a similar metaphysics in much more abstract terms.

    He has a funny passage on Clinton’s health care bill you might like:

    “A man writes a health-care reform bill in his White House. It
    starts to melt in the media glare. He takes it to the Hill, where
    it continues to melt. He does not say goodbye.

    Although economic indicators show unmistakable signs of re-
    covery, the stock market dips. By way of explanation, TV commentators cite a second-hand feeling. The man’s “waffling” on other issues has undermined the public’s confidence in him, and is rebounding on the health-care initiative. The worry is that Clinton is losing his “presidential” feel. What does that have to do with the health of the economy? The prevailing wisdom among the same commentators is that passage of the health-care would harm the economy. It is hard to see why the market didn’t go up at the news of the “unpresidential” falter of what many “opinion-makers” considered a costly social program inconsistent with basically sound economic policy inherited from the previous administration, credited with starting a recovery. However, the question does not even arise, because the commentators are operating under the assumption that the stock market registers affective fluctuations in adjoining spheres more directly than properly economic indicators. Are they confused? Not according to certain economic theorists who, when called upon to explain to a nonspecialist audience the ultimate foundation of the capitalist monetary system, answer “faith.”17 And what, in the late-capitalist economy, is the base cause of inflation, according to the same experts? A “mindset,” they say, in which feelings about the future become self-fulfilling prophesies capable of reversing “real” conditions (Heilbroner and Thurow 151). The ability of affect to produce an economic effect more swiftly and surely than economics itself means that affect is itself a real condition, an intrinsic variable of the late-capitalist system, as infrastructural as a factory. Actually, it is beyond infrastructural, it is everywhere, in effect. Its ability to come second-hand, to switch domains and produce effects across them all, gives it a meta-factorial ubiquity. It is beyond infrastructural. It is transversal. This fact about affect-this matter-of-factness of affect-needs to be taken seriously into account in cultural and political theory. Don’t forget. “

  2. Thanks, AwC. That’s pretty excellent.

    I don’t remember much about Massumi’s discussion of financial markets, but I wonder if he ever connects this affective infrastructure up with labor and production. So far, and I’m still on the first chapter, Marazzi, even though he insists that finance is more than ever connected with the real economy, doesn’t really show the connection. In fact, I’d say his outlining of market movement as being driven by consensus and public opinion removes finance even more from production than do finance-as-parasite approaches. Maybe it will be language that provides the link.

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