Chracterstics of financial marketing on basis of cartoon published in 1987 after the market crash.

1. Essay
Characteristic of Financial Market
on
Basis Of
Cartoon depiction

2. TABLE OF CONTENTS
Ch. No. Title Page No.
1. Background of Study 3
1.1 The General Theory 3
1.2 Keynesian rational 5
1.3 Convention 6
2.Depiction from the above humoristic cartoon 8
2.1 1929 Market Crash 9
2.2 1987 Market Crash 10
3. Conclusion 11
List of References 12

3. Background of Study
The General Theory
It is necessary to begin with a short summary of The General Theory to clearly understand
about the speculative and unpredictable nature of the market. Non economists are unable to
explain the fundamentals of the macroeconomics based on the General Theory given by John
Maynard Keynes, the eminent British macroeconomist and Bloomsburg intimate. Some work
is required to narrow down the disciplinary divide between the economists and the literary
critics. In his introduction to The General Theory, Nobel Prize winning economist Paul
Krugman gives a lucid summary of Keynes’ argument expressed as four bullet points:
 Economies can and often do suffer from an overall lack of demand, which
leads to involuntary unemployment. 

 The economy’s automatic tendency to correct shortfalls in demand, if it exists
at all, operates slowly and painfully. 
Page 3

4.  Government policies to increase demand, by contrast, can reduce
unemployment quickly. 

 Sometimes increasing the money supply won’t be enough to persuade the
private sector to spend more, and government spending must step into the
breach”. 
The first bullet point explained by Paul Krugman expresses the notion of “under
consumption” and is worth discussing in some technical detail, as it establishes the premises
from which the rest of Keynes’ argument follows. Prior to the publication of The General
Theory, orthodox economics was based on Say’s Law and its subsequent canonization as the
“law of markets.” Briefly, Say’s Law postulated that the aggregate supply of products in the
economy created their corresponding aggregate demand, i.e. the sale of Product A by Person
X paid for Person X’s purchasing of Product B from Person Y, which in turn paid for Person
B’s purchasing of Product Z from Person C, ad infinitum. The market was thought to
stabilize at a defined and unique equilibrium point where aggregate supply equals aggregate
demand, and full employment levels sustained uninterrupted production and consumption
patterns across all commodities. Say’s Law enjoyed privileged status amongst nineteenth
century market theorists, but reached its theoretical break point during the Great Depression,
when confronted with depressed consumption levels and persistent unemployment.
In response to the limited explanatory power of Say’s Law during the Great Depression,
Keynes challenged its equilibrium assumption by expressing “aggregate supply” and
“aggregate demand” as functions of the employment level. Instead of modeling supply and
demand as autotelic processes, Keynes derived both from the number of men allocated to a
particular productive function: the aggregate supply function was the output, Z, from
employing N men (Z = φ(N)), and the aggregate demand function was the proceeds, D, from
employing N people (D = f(N)), whereby the aggregate volume of employment would be
given by the value of N where Z=D. Keynes wrote Say’s Law, assumed that “f(N) and φ(N)
were equal for all values of N,” but if this were true, “competition between employers would
always lead to an expansion of employment up to the point at which the supply of output as a
whole ceases to be elastic” . More simply put, Say’s Law categorically asserted that full
employment would be an economic constant, a hypothesis that flew in the face of the 1930s’
economic experiences.
Page 4

5. To account for recessionary economics, Keynes formulated the relationship between
employment and aggregate supply and demand as follows: increases in employment (N)
would increase aggregate income and aggregate consumption but not in a one-to-one
relationship, as an individual would not always consume 100% of what he or she earned. He
or she would have a choice, Keynes wrote, between consuming, saving, and investing his or
her savings. The individual’s propensity to consume would depend not only on an increases
in his or her earnings, but on his or her “the current amount of investment”; this, in turn,
would depend on “the relation between the schedule of the marginal efficiency of capital and
the complex of rates of interest on loans of various maturities and risks”, i.e. a future
discounted cash flow (DCF) calculation of the internal rate of return from an investment
made today. Keynes claimed that both the propensity to consume and the propensity to invest
would set the new rate of employment, which could only correspond to full employment
under a very specific set of circumstances.
From there, the prescriptive recommendations of The General Theory were easily derived. In
times of widespread unemployment, simply printing more money (as Say’s Law advocated)
would not necessarily increase economic activity, as individuals would be inclined to allocate
that money towards savings or investment, rather than consumption. Rather, for consumption
to increase, individuals with little or no income – mainly the unemployed – would have to
find means of generating income in order to increase their real purchasing power. From this
observation, Keynes concluded, “A somewhat comprehensive socialisation of investment will
prove the only means of securing an approximation to full employment. If the State is able to
determine the aggregate amount of resources devoted to augmenting the instruments [of
production] and the basic rate of reward to those who them, it will have accomplished all that
is necessary”. This section of The General Theory was forever memorialized as Keynes’
famous gesture towards the contemporary welfare state: governments ought to establish
public service programs that provided employment for the unemployed, and subsequently
increased real purchasing power in the economy.
Keynesian Rationality
Keynes never gave his readers a specific definition of rationality in The General Theory, but
did provide one in his earlier work A Treatise on Probability. Keynes wrote: “When once the
facts are given which determine our knowledge, what is probable or improbable in these
circumstances has been fixed objectively, and is independent of our opinion. The theory of
Page 5

6. probability is concerned with the degree of belief which it is rational to entertain in given
conditions, and not merely with the actual beliefs of particular individuals”. The rationality
of an individual has nothing to do with whether or not a given belief is cohesive, quantifiable,
or even correct, e.g. “The value of gold will rise 25% this year,” “Colonial politics will make
trade more profitable.” Rather, rationality represents the degrees to which presumed
informational constraints, what Keynes calls “knowledge,” inform our probabilistic
assessments of future outcomes. For Keynes, rationality is never localized in the substantive
end state of a process, e.g. a botched investment based on incorrect cash flow calculations,
economic deregulation. Rather it resides in the procedural assessments by which an investor
has reached that end.
Given this definition of rationality, there exists an important theory of investment psychology
that Keynes outlines in The General Theory. Keynes suggests that the calculation of
investment yields, what he calls investor’s “long-term expectations”, are based on “partly
existing facts” and “partly future events which can only be forecasted with more or less
confidence”. Future valuations are arrived at by projecting the current state of affairs into the
future, and by accounting for any modifications that may alter existing expectations. The
ritualized calculation of long-term expectations based on present day beliefs is an example of
what Keynes calls “a convention”.
Convention
Michelle Baddeley and other economic theorist propose that “convention” represents the
convergence of investor beliefs in environments plagued with informational uncertainty. To
make the link to Keynes’ definition of rationality, it should be added that conventions are
dialectically and dynamically updated in proportion to changing probabilistic knowledge. It is
no accident that in his description of convention in The General Theory, Keynes echoes the
same descriptive characteristics that he attributed to rationality in A Treatise on Probability.
Convention, Keynes believed, represents the pooling of investor belief at a point where “the
existing market valuation, however arrived at, is uniquely correct in relation to our existing
knowledge of the facts which will influence the yield of the investment, and that it will
change in proportion to changes in this knowledge”.
Because conventions are overtly social phenomena that arise amidst imperfect information,
they reflect a totalizing overlap between individual and aggregate belief and behaviour – they
Page 6

7. dialectically proxy “the truth.” To give an example: an individual investor will act according
to a particular convention (e.g. “Buy 100 shares of Western Union at $2 per share!”), and that
convention will self-perpetuate due to the collective beliefs and subsequent acts of multiple
investors (e.g. “Western Union’s stock price just rose from $1.92 to $2!”). Convention, then,
cannot rightly be opposed to rationality, as it represents the best, i.e. most informed, or most
calculated, valuation that investors arrive at by evaluating the only thing they can evaluate –
each other’s beliefs.
Keynes argues that professional investors make money by anticipating disproportionate
swings in investment valuations, and moving their money around in response to short-term
gains and losses. Highly liquid investments make speculation cheap and easy, and aggregate
economic performance becomes dependent on the casino-like strategies of Wall Street and
the London Stock Exchange.
Immediately after presenting his assessment of speculation, however, Keynes issues a caveat
against reading too much into irrationality: “We should not conclude from this that
everything depends on waves of irrational psychology. On the contrary, the state of long-term
expectation is often steady Our rational selves choosing between the alternatives as best we
are able, calculating where we can, but often falling back for our motive on whim or
sentiment or chance”. In one sense, the limitations help us marginalize complaints about
speculation by pointing to its relative infrequency. The implication is that the Keynesian
market is neither inherently irrational, nor do investors constantly invoke whim, sentiment, or
chance when there is information they can leverage. Instead, behaviour is dictated by
convention only when there is no pure informational basis for one investment strategy over
another. Because information aggregates and markets self-correct over time, long-term
expectations will converge at some “true” valuation estimate, rather than exhibit constant
volatility. The default setting for both individuals and the market is rational decision-making
and rational outcomes, even if imperfect or asymmetric information momentarily forces
individuals to deviate from strictly rational calculations.
However, speculative behaviour can also be accounted for as a type of convention par
excellence. Speculative investment decisions are never motivated by a desire not to maximize
profits or expose the “true” value of a stock. The animalistic investor, Keynes argued, derives
his “spontaneous optimism” from a punctuated, market-wide convention of exuberance.
Moreover, for the critics that speak of speculation with disapproval, Keynes argued that a
Page 7

8. certain amount of conventional self-deception is needed if enterprise is not to “fade and die”.
Optimism is the only means by which credit can circulate.
Decision-making based on convention is, for Keynes, the most rational method of procedural
evaluation possible in imperfect informational environments, even if the end result is sub-
optimal asset allocation. Conventions absorb “whim, sentiment, and chance” within a
dynamic and dialectic totality, tempering impulse and stabilizing the systematicity of
valuation and exchange.
Depiction from the above humoristic cartoon
The above cartoon depicts the speculative and unpredictable nature of the stocks and the herd
behavior of the stock market. As has been explained in the general theory by Keynes the
decision is made on the basis of convergence of investor beliefs in environments plagued
with informational uncertainty. This cartoon depicts how the information has been perceived
by the investors as shown the original message was that the stock could really excel which
was wrongly perceived as sell by someone and this phenomenon self-perpetuated due to the
collective beliefs and subsequent acts of multiple investors. In the second part of the cartoon
similar instance happened when Good Bye was perceived by the investor as a Good Buy this
also self-perpetuated and became the act of multiple investors. It depicts the lack of adequate
information and speculation the investors made on the basis of the thinking of the other
investors which led to multiple investors either buying or selling in a share on the basis of a
rumor. Above cartoon can also be depicted as following herd behavior by the investors as
they followed the decision made by the one investor on the basis of lack of information and
then followed him without having the appropriate information. This characteristic has also
led to various historic ups and downs in the stock market two huge examples that could be
1929 crash and 1987 crash of the stock market which have been briefly explained below.
1929 Crash
Page 8

9. Monthly Chart of Dow Jones Index for 1929
The monthly chart shows the eventual market low in 1932. Although investors would have
recovered their losses earlier due to dividends, the DJIA did not make it back to its 1929
highs until 1954. Some economists believe that some of The Causes of the 1929 Crash was
Stocks were Overpriced, Massive Fraud and Illegal Activity, Margin Buying, Federal Reserve
Policy, Public Officials' Repeated Statements. Many public officials commented that the
stock prices were too high. For example, the newly elected President of the United States,
Herbert Hoover, publicly stated that stocks were overvalued and that speculation hurt the
economy. Hoover's statement suggested to the public the lengths he was willing to go to
control the stock market. These kinds of statements encouraged investors to believe that the
market would continue to be strong. This statement was perpetuated among the investors and
this led to 12,894,650 shares changed hands on the New York Stock Exchange-a record,
which could be one of the causes of the Crash.
1987 Crash
Page 9

10. Monthly Chart of Dow Jones Index for 1987-1988
Reasons which are sited for the 1987 crash are Margin calls, program trading and difficulty
obtaining information. Difficulty obtaining information Uncertainty and herd behaviour also
contributed to the crash. With rapidly changing prices, information about current market
conditions was difficult to obtain. Price quotes for stock and stock indexes were not
necessarily reliable since some stocks were temporarily not open for trading. Rumors about
market closings added to the confusion. Given the uncertainty, investors apparently sought to
sell and close out their positions. With the dearth of reliable information, herd behaviour
reportedly became common. Robert Shiller surveyed market participants promptly after the
crash and many conveyed to him that, on the day of the crash, they were reacting more to the
price movements than to any particular news.
In both the examples cited above speculative nature and herd approach of the market is quite
evident as they are cited as one of the main reasons for the market crashes in 1929 and 1987.
Page 10

11. Conclusion
All the technical analysis uses the fact that the past events are likely to be repeated in the
future and on basis of these facts various predictions are given for the future. Technical
analysis is the search for patterns that repeat themselves across prices, like for example a
head and shoulders top pattern. But there are certain examples where the market has followed
a random or unpredictable approach rather than following as per predictions by the technical
analysis. Market is highly affected by the speculations and rumors as is seen in some cases of
the market crashes. Also there are various examples that show how the rumors have made the
stock price rise or to fall to a great extent which again shows the speculative characteristic of
the market. In the end it would be appropriate to say that the markets heavily speculative and
are unpredictable and cannot be alone judged by the technical analysis alone.
Page 11

12. List of References
http://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf (accessed on March
11, 2014)
http://www3.nd.edu/~jstiver/FIN462/US%20Market%20Crashes.pdf(accessed on March 11,
2014)
http://modernism.research.yale.edu/wiki/index.php/The_General_Theory(accessed on March
12, 2014)
http://www.math.uchicago.edu/~lawler/srwbook.pdf(accessed on March 13, 2014)
JSTOR: The Economic Journal, Vol. 101, No. 405 (Mar., 1991), pp. 276-287(accessed on
March 11, 2014)
Economics: Principles and Policy - William J. Baumol, Alan S. Blinder - Google Books(accessed on
March 12, 2014)
Probability and uncertainty in Keynes"s The General Theory - 16387.pdf
Page 12