Market Gullibility

Stephen Chung

Executive Director

Zeppelin Real Estate Analysis Limited

November 2003 

A market is generally / potentially gullible when it market participants can be easily persuaded, though persuasion in this sense carries with it a negative tone as it implies someone is being taken advantage of (fooled) by another party resulting in the demise of the former and incurring a benefit for the latter. There is even no need for the former to present lies, half-truths, or twisted-facts, and the mere exaggerating (or exceedingly downplaying) of certain information, data, or opinion would usually suffice. Or for that matter, the related piece of information, data, or advice can be positive in nature e.g. reduced interest rates and exaggerating its capability in leading to a better economy, yet it can also be negative e.g. reduced family income and downplaying its impact on the economy and real assets. Naturally, market participants that make good use of prevailing market conditions to their own benefit without falling for the exaggerated / downplayed messages are not considered gullible.

How gullible a market is depends on a lot of factors and circumstances, and these would include the overall educational level, societal sophistication, attitude toward life, amount of wealth, cash liquidity, economic performance, and the like among others. Of all these, perhaps the ability to control, manage, and / or better utilize one’s greed level and emotions may be paramount, and at times seemingly well-educated professionals can also fall prey to their own greed and emotions. Markets which participants generally adopt a rational and methodological approach to investment are likely to be less gullible and vice versa. Nonetheless, the more rational markets tend to be less ‘exciting’ or volatile while the opposite is true for those markets that are not given all things being equal. A casual observation of major world markets today seems to suggest rational markets are few and far between.

Gullibility also reflects how self-confident the participants “really” (versus pretending to be self-confident) are, and the more self-confident they are, the less gullible they tend to be. Or putting it this way, the less self-confident the participants are, the more they have to rely on the advice and opinions of others, and thus are subject to a higher chance of manipulation. Some manipulators, defined as those dishing out knowingly in most cases the exaggerated / downplayed messages, would love a gullible market, in particular a cash-rich one. Shrewd manipulators would even let the gullible participants feel invincible.

Measuring the level of gullibility is not an easy task though volatility can be a useful indicator, notwithstanding such can also be caused by a variety of other factors. Quantitative methods aside, gullibility can also be observed via gauging market reactions to certain market events, news, messages, or information. In short, a gullible market offers an easier opportunity to make more money (higher return) though may also present a bit more risk (as the gullible may lose confidence easily or can be fickle minded) given all things be equal.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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