The role of beliefs in markets

The other day i used the idea of a living science as an example of how objective reason is an illusion, and the rather central importance of beliefs.

In the same way that we can't have science without the pre-scientific belief that there is a discoverable order of things, isn't the belief markets reflect supply and demand similarly the result of the underlying belief that resources ought to be valued in proportion to their scarcity?

When he made his inquiry into the nature and causes of the wealth of nations, Adam Smith didn't uncover the mystical natural order of the market place. Instead he issued a prescription, which just so happened to be intellectually satisfactory to his contemporaries.

A widespread political doctrine has, as a rule, two very different kinds of causes. On the one hand, there are intellectual antecedents: men who have advanced theories which have grown, by development or reaction, from previous theories. On the other hand, there are economic and political circumstances which predispose people to accept views that minister to certain moods.

I'm sure beliefs and actions based on supply and demand long preceded Adam Smith, but like the case with science, such beliefs in turn probably cater to latent human desires. In any case I think we would be severely misguided to continue seeking to establish either the truth or falsity of the concept, not least because like all illusions it misdirects our attention from the real action.

Vis-a-vie supply and demand, all that matters is that it is a widely held belief, and insomuch as it is consequently an operative cause of action for those who participate in markets we must accept that the belief is self-perpetuating. By believing in it, people unwittingly create a perception of reality that is largely self-supporting, and further it conditions them to actively search for evidence of those self-fulfilling expectations!

Were every market participant to believe so ardently in the "truth" of fibonacci retracements on a daily candle I'm almost certain the effect would be identical.

The problem we face is that these types of belief are probably the rule rather than the exception. And unfortunately that means their circuitous assumptions enable otherwise intelligent people to unwittingly perpetuate an illusion of rational debate.

In view of our failure to find an answer to Hume, "reason" cannot be regarded as something absolute, with any departure being condemned on theoretical grounds. Consequently we ought to be realistic and accept that any reliance upon reason must assume a certain community of interest and outlook between oneself and one's audience.

It is true that Mrs Bond tried on her ducks, when she cried, "come and be killed for you must be stuffed and my customers filled"; but in general the appeal to reason is thought ineffective with those whom we mean to devour. Those who would believe in eating meat do not attempt to find arguments which would seem valid to a sheep, and Nietzche does not attempt to persuade the mass of the population, whom he calls, "the bungled and botched". Indeed, nor does Marx try to enlist the support of capitalists.

When communal assumptions cannot be found, men are driven to rely on their own intuition. Thankfully this is not the case with markets, since without large scale bias' I would imagine they'd be practically unpredictable.

The punch-line to this rant is that with markets, the apparent regularities we see in pricing are no more than the complex result of the many operating beliefs of the market's participants. This is reality. From this not even the so-called laws of supply cannot escape.

Imagine if every single punter at the Melbourne Cup this year placed their bet on the apparently irrefutable communal belief that only even numbered horses win races... it would considerably alter the market's pricing dynamics.

And so it is with beliefs and all markets.