Table of Contents
- Introduction
- Question A: Book Review
- Herding
- Buy Equity Market and Fund Management essay paper online
- Overconfidence
- Repeated Irrational Behavior
- Trading On Your Heart Rather Than Head
- Incomplete Information/Signals
- Question B: Similarities between Great Depression and Great Recession
- General Features
- Economic Impacts
- Trade Insight
- Addressing the Problem
- Outcomes
- Conclusion
Introduction
It becomes increasingly difficult to ignore the fact that both national economy and macroeconomics heavily depend on maturity of equity markets. It is certainly true, since equity markets present an objective value of business; equity market and fund management have become strong components of economic processes on the national and global levels. In such a way, decline at equity market results in economic recessions as it happened during the Great Stock Market Crash and the crisis of capital investment trust in the United Kingdom. Those events are often compared in regards of similarities. Besides, an objective and original point of view is presented in the book The Great Crash 1929 by John Kenneth Galbraith. The author argues that the Great Depression was mainly dependent on behavioral patterns of investors and fund managers, meanwhile a similar situation can be observed with the Great Recession.
Question A: Book Review
Herding
Speaking about the book The Great Crash 1929 by John Kenneth Galbraith, first, it is appropriate to highlight the concept of herding in equity market behavior. The author relevantly noted the fact that fund managers, investors, and average Americans acted as a herd: everyone was striving for the same financial goal without much consideration of possible consequences (Bikhchandani & Sharma 2000). Undoubtedly, a common attempt to achieve a single objective leads to depreciation of this goal (Adams 2004). The book mentions that the competition for fast and easy enrichment caused speculative bubble and then resulted in a Great Depression and Great Stock Market Crash (Bikhchandani & Sharma 2000). The author places emphasis on the fact that all stakeholders were acting according to the same pattern: everyone was attempting to invest or trade as much as possible in order to make profit from growing prices on options (Adams 2004). Herding equity market behavior is usually associated with the lack of knowledge that the real value of stock is determined not only with a number of volumes but also with its price per one option.
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Overconfidence
The author of the book claims that the main reasons of the Great Stock Market Crash originated from behavioral issues (Galbraith 2009). The initial success of the first trades and subsequent boom on real estate speculations in Florida made investors, fund managers, and other stakeholders extremely overconfident in the fact that such a tendency would last for a long time. Meanwhile, buyers of a real estate in Florida were convinced that the climate over there was of big difference and purchased an apartment in a resort area (Galbraith 2009). The book describes that evidence as one of the Great Depression’s causes even though the author did not say anything about the unpredicted nature of equity markets; changes in stock prices are almost unpredictable, thus confidence is not possible in that regard (Adams 2004). However, risk-free periods can be calculated, while yields and volatility rates can be leveraged to a particular extent (Adams 2004). The book does not contain the description of these issues, but the author admitted that overconfident behavior is one of the key factors of the economic disaster in 1929.
Repeated Irrational Behavior
In a similar way to herding, the book depicts a mode of repeated irrational behavior. In spite of the fact that many stocks lost their initial value, people kept investing in companies with currently high-priced options (Galbraith 2009). The author also explains that with a behavioral point of view saying that people want to make profits as soon as possible (Haramis 2007). In addition, a doctrine of the American Dream was gaining popularity those days, so many Americans recognized an opportunity for reaching prosperity in investing money in equity markets (Sherman 2015). Conversely, the author assumed that the Great Stock Market Crash of 1929 would teach the next generations a lesson (Galbraith 2009). It is certainly not true, since the evidence of the same repetitive irrational behaviors can be still observed nowadays.
Trading On Your Heart Rather Than Head
The book appropriately made a remark in regards to the fact that speculative bubbles were generally rash decisions, which should have been not taken without a profound analysis of the outcomes (Hammond 2010). The book even blames the President, who noticed a sign of a negative tendency, but his excessively optimistic attitude towards development of the U.S. economy made him act in a way that was associated with fulfilment of the American Dream: middle class was gaining prosperity very fast, but no market entrance guidelines were followed (Galbraith 2009). People were investing money without developing a personal strategy of enrichment, which is essential for capitalizing on equity market (Hammond 2010). The majority of the investments failed as long as investors and fund managers were substituting a real vision of consequences with the desired short-run benefits.
Incomplete Information/Signals
As a matter of fact, the book does not discuss a perspective of information and investor awareness. Perhaps, the author considered these aspects to be implied a priori, so that there was no need to be explicit about them. Nevertheless, the book misses the entire aspect of equity market behavior: structuring of uncertainty (Zacks 2011). Even though the book did not give an account of this evidence, investors and fund managers did not recognize uncertainty, considering the fact that they were confident in successful outcomes of their investing and trading activities (Adams 2004). A failure to structure uncertainty in to-be-invested companies and associated risks resulted in the Great Stock Market Crash and subsequent Great Depression (Zacks 2011). Provided that some investors had overestimated a value of certain stocks, more prudent investments would have arbitrage these overpricing in their benefit (Adams 2004). Since the uncertainty and risks were not recognized, the structures of the entire equity market faced a crash. The author does not describe the problem in such terms, but they are still closely attached to a behavioral nature of trading at equity markets.
Question B: Similarities between Great Depression and Great Recession
General Features
Both economic collapses can be associated with the temporal increase in stock prices and their subsequent depreciation because of the proactive and unplanned investments. After the Great Stock Market Crash, a crisis of capital investment trust in the United Kingdom is the first similar event (Kitao 2005). Therefore, these two events are associated with each other. Regarding equity market trends, both periods occurred in the middle of substitution of traditional business orientations for modern, technologically and capital-driven forms of entrepreneurship (Worstall 2012). Both cases resulted in negligence of the general economic rule that excessive presence of a particular asset leads to its depreciation (Fields 2010). The Great Stock Market Crash happened in the beginning of a traditional capitalism, whereas the crisis of capital investment trust in the United Kingdom occurred in the beginning of the third wave of digital revolution.
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Economic Impacts
Both economic crises led to strong enrichment of the most influential investors and the spread of poverty among the middle classes. As a consequence, a crisis of capital investment trust in the United Kingdom was preceding the Great Recession, once a value of publically trading companies was diminished (Gorman 2010). The consequences of the crisis of capital investment trust in the United Kingdom had long-run effects, since the low value of publically owned business reflected on a value of workforce, and depreciation of wages and unemployment became the most realistic threats (Nabi 2011). The same situation was observed in 1929, which is why these events are often compared. Besides, as it has been mentioned previously, the growth of unemployment is a distinct economic impact of both disasters. In addition, there was a depreciation of human labor, because new business models and the development of technology made companies hire fewer workers, especially under circumstances of low market value (Hetzel 2012). This evidence is also applicable to both cases.
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Trade Insight
In regards to changes in business orientation, many investors and fund managers were attempting to speculate on a growing trend. For instance, the Great Stock Market Crash period was preceded with a trend on investing in currently high-priced companies that were trading at NYSE. Concerning the crisis of capital investment trust in the United Kingdom, recognition of the trend on “doing more with less effort” opened numerous opportunities to invest in online trading companies; overproduction was an adequate response to offered cash flow opportunities (Worstall 2012). In addition, a wave of speculative bubbles in 1920s was quite widespread. As a result, a group of entrepreneurs became instantly reach, meanwhile their clientele lost the initial value of purchased stocks or real estate (Braude 2013). A similar tendency can be traced in proactive trading with derivatives, hedge funds, and real estate in the UK. Even under circumstances of a strong governmental control of securities trade, some investing organizations managed to conduct shadow transactions and trades, which resulted in depreciation of nationally-controlled funds (Weller 2011).
Addressing the Problem
Both the Great Stock Market Crash and the crisis of capital investment trust in the United Kingdom were addressed throughout a similar, governmentally institutionalized method of leveraging the situation. In both cases, the use of national reserve fund covered the debts and expenditures of banks, private investors, and leading corporations (Canterbery 2011). A similar situation can be traced nowadays: the government offers cooperation to various companies for coverage of commodity and other types of debts, so that they are able to trade at equity market and keep their market value balanced. Again, both cases demonstrate that such approach was ineffective even though equity market decline was leveraged (Canterbery 2011). Generally speaking, the government became a single trust representative, which ensured a success of all transactions. Overall, similarity of both cases suggests that even the most democratic approach to business equity trade expects a careful monitoring of the government as the main protector of transactions’ transparency (Rosenberg 2012). At any rate, all features of the Great Stock Market Crash and the crisis of capital investment trust in the United Kingdom resulted in similar outcomes.
Outcomes
Eventually, both the Great Stock Market Crash and the crisis of capital investment trust in the United Kingdom resulted in a major change of business orientation. As a consequence, equity markets and fund managers start recognizing new forms of management and behavior at stock markets (Wessel 2014). The Great Stock Market Crash revealed a rule that stock prices can fluctuate randomly, so that volatility rate is a distinct risk, especially on a long run (Heng 2010). Investors of this period were expecting stock to keep growing in price throughout longer terms of trade meanwhile real estate speculators were already acknowledged about shortcoming depreciation of trading assets (Braude 2013). Nowadays, the crisis of capital investment trust in the United Kingdom resulted in a switching of emphasis on information technology-driven performance, so that entrepreneurs who first recognized this tendency started yielding their capitals (Heng 2010). A drastic difference in competitive advantages enlarged a difference between rich and poor people, therefore a value of produced goods and trading assets dramatically declined through the years of the crisis of capital investment trust in the United Kingdom.
Conclusion
It is appropriate to make a general comment on the fact that the Great Stock Market Crash was a result of behavioral issues related to participation in trades at equity markets. Therefore, performance at equity markets is largely determined with behavioral patterns of investors and fund managers. The review of the book called The Great Crash 1929 by John Kenneth Galbraith suggests that the majority of mistakes made in that period were behavioral. Furthermore, a similar tendency can be observed even nowadays; comparison of the Great Stock Market Crash to the crisis of capital investment trust in the United Kingdom is reasonable in many ways. Macroeconomics and equity markets face similar declines owing to the common factors such as overproduction, speculations, and change of entrepreneurial orientation. Thus, fund management has to follow a distinct framework of guidelines for trading at equity markets, since their economic nature is universal.
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