ACCUMULATING PERIPHERALS


The psychological need to convince yourself prices are rational by mattsteinglass
October 15, 2009, 12:21 am
Filed under: Economics

Megan McArdle notes aptly that the Dow hitting 10,000 looks different in hexaduo decimal:

Amidst all the excitement, it’s worth remembering that if we had just two more fingers, we’d still be waiting for it to hit 20,736.

Which is true, but how can you note this and still believe in the Efficient Markets Hypothesis? We’re acknowledging here the existence of arbitrary symbolic price levels in indexes that lead people to be more or less optimistic about broad market trends. Doesn’t this kind of have to imply that you think prices have a significant arbitrary psychological component? Obviously the fact that many retail goods cost $9.95 and none ever cost $10.05 has the same implications, but I suppose one could dismiss this effect as a minor rounding error that doesn’t much affect overall price levels; it seems hard to say the same thing about the jubilation that attends breakthroughs in arbitrary ceilings like Dow 10,000.

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