It has passed almost 400 hundred years from the Dutch Tulip mania. During all these years humanity was constantly developing, we intend to share the most common perception of the western individual development and progress. Exceptionally, we believe that the progress touched all areas of our lives including education, healthcare, proficiency in general, and a capability to access enormous amounts of information almost effortless. On the other hand, some recent examples of stocks crash in the market intend to contradict this myth of progress. When we are talking about our fantasies and archetypal blindness of the reality in our mind, we might be still far away from the “advanced” approach.
BooM! BanG! BooM?
In the year of 1634, Dutch republic with the port of Amsterdam was more or less the center of the world of trade, culture and political power. Rich merchandisers represented the golden age of Dutch economic power all over the globe. At this prosperity age the bulb of the Tulip unexpectedly became the symbol of the most precious and valuable good of the trade and speculations. The growth of this market reached spectacular bubble, where one exclusive tulip bulb could have been easily worth the value of the mansion. However, this madness didn’t last long and in 1637 the crash of this fragile commodity price took down all the economy and assets of many rich citizens.
The transfixion of such fictional value creation behavior, during a long history of our civilization, happened already too many times and that’s why it is worth to write about it again. These days of artificial intelligence, robotics, or university education in your mobile phone, are still not preventing us from behavioral patterns simply to repeat again and again without our will and knowledge. Seems like they are simply standing aside the steep curve of development.
Let’s begin with few examples of exceptional value bubbles in modern stock exchanges. In the year of 2019, revolutionary plant-made meat substitute company Beyond Meat became today’s Tulip bulb. In the minds of financial markets participants, including ordinary, not professional persons, and financially educated professional participants, this company had an unrealistic and together invincible picture of the future. Beyond Meat had not only to challenge the meat consumption on our tables but as well could easily challenge some meat providers for survival all around the globe. The archetypal imagination overtook the rationality on possible valuation of the company. Very quickly after the IPO, valued at 1.4 billion dollars, company valuation reached almost 20 billion. However, it didn’t take long for it to shrink back to 1 billion dollars mark. Lots of “blood” has been poured out at that time.
Very similar story happened with a marijuana wonder Tilray. When in 2018 the sudden valuation of 150 billion had a hard landing till todays valuation under 2 billion. In addition, it’s worth to mention the stock that’s known almost to everyone, who are tracking any type of news. Electric vehicles manufacturer Tesla, with Elon Musk in front seat, in the beginning of the year 2022 has reached the price peak with company’s valuation over 1.2 trillion USD. Just after one year the stock is trading at the 322 billion USD mark. To the list of bubble type overvaluations, we can add all cryptocurrencies, with price maneuvers on the roller coaster path every single month.
Irrationality of analysts and investors could be always defended with aggressive and constantly changing valuation models and optimistic expectations. But actual losses of the people in these hunger games of the markets just pushes them into checkmate situation. These painful experiences of many have revived my interest into psychological forces that independently from the knowledge and background education could blindly push many of investors into the dream of quick fortune and easy markets conquer quests.
Emotional fragmentations of the reasoning
I have used the term “archetypal” already few times. Particularly this psychological term came into my mind when I was thinking of the unquestionable surrender of an individual’s thinking abilities to an imaginary believe or a dream. Carl Gustav Jung abbreviated the term as the common unconscious forces of all humankind, that persons, to different extend, are indirectly following and obeying to. Not everyone is influenced by the same archetypes and with the same engagement at the same time. However, at some points in life we all could obey to one or another archetype without knowing it.
From the perspective of the timing, one pattern, very well known in the investment field, is – buy the stock at the top and sell it at the bottom. Even if, many investors see this as the worst-case scenario of their financial decisions, unfortunately it’s happening more often than they would expect. Drastic stock price increase, big media coverage of the positive movement might leave us with sense of the loss and lateness. If these thoughts are intensifying and begin shuffling with the guilt and shame, curtains might quickly come down on the rationality. Investment actions at these situations could be enforced by the actions directly related with an avoidance of unpleasant feelings, instead of more rational and well measured steps. Vice versa actions might take place at the price bottom when pressure to act quickly with the investment collapsing drama picture can easily blind anyone.
Another important and powerful blind spot, with a capability to disconnect us from the reality, is the fantasy of big, effortless fortune and unlimited growth potential. Many of us tend to exaggeration of the situation when it is a bad one. However, we are not often acting in opposite direction when we are experiencing something good. Very similar imaginations can overtake the control of our investment actions. Investors quite often experience the strong desire of alter reality and depictures the opportunities and future scenarios of stock behavior and company dominance in distorted way. Strong wishes and needs to change the personal unpleasant reality might significantly enforce the disassociation from the more adequate future valuations and an ability to accept the reality. This might easily force actions to buy the asset, with an unidentified value, now, as it did the same way 400 years ago.
Above mentioned factors can work solely and in close cooperation. Collaborative efficiency of the archetypal behavior becomes even more urgent, deep, and blinding.
Do we have any antidote to this never-ending story? From the historical point of view, not really. We try to enrich our knowledge on mathematical understanding of the markets. However, often forgetting that part of the things that are happening in the markets are based on social human behavior. Sticking to unrealistic valuation models will always leave you with real exposure to big loss situations repeatedly. Contrary, looking into investment topic more broadly can give you even more insightfulness of the situation and limit your exposure to crowd related actions step by step. With the help of our wonderful ability to learn independently of our age, we can give yourself more hope for better performance materiality and mentally in some crazy wonders of financial markets.