11th Grade: Market Psychology


This week we looked at the Stock Market Crash of 1929 and how it happened.   Not all Stock Market crashes cause deep depressions or recessions, and in fact, many now argue that the Great Depression had many other factors besides the ’29 crash.  For example, only about 3% of Americans owned any stock at all in 1929.  But I do think that the crash both revealed and foreshadowed deep problems within the economy as a whole, and so I still thought it worthwhile to examine.  At the very time, for example, when the stock market rose dramatically, key industries like agriculture and construction showed major signs of weakness.
Not only that, it gave us a great platform to discuss the bursting of the dot-com bubble in 2000, which did not bring about substantial economic harm, and the crash of 2008 recently which did.  What were the differences in the two, and which was 1929 more like?  It seems that the 2000 dip revealed a weird anomaly in the economy, whereas in 2008, the problems lay much more at its heart, with our financial system in general.  Here are a few different graphs that show similar drops in the market, but each had its own particular effect on the economy:
This graph suggests that maybe market ‘crashes’ are simply ‘corrections.”
We spent two days this week on our own’Stock Market of the  1920’s’ activity.   My main purpose was not recreate  entirely how stocks are actually sold and have value.  I wanted the students to focus on understanding the psychological aspect of not only stock value, but the  value of anything at all.  After all, what makes our paper money  valuable in itself?  Only that we have all agreed as a society that it  does carry value.  If we lost that belief, the economy would collapse  shortly.  
In our game the four teams quickly got a handle on how they could disrupt other teams.  Each began with a diversified portfolio, but watchful eyes soon noted who had accumulated the most amount of a certain stock.  Other teams would then work hard to devalue that stock, trying to sell it to others at ridiculously low prices, with the some teams countering by buying it way too high.  
This instability made the market wobbly, whereby the ‘government’ (myself) stepped in to buy shares at market prices.  Unfortunately, this strategy left the government holding a great deal of unpredictable stock.  Luckily for all, one investor decided to buy back from the government at slightly higher than market rate, which boosted market confidence in general.  That move propelled them to a narrow victory.
I hope the students had fun, as I did watching their not very subtle machinations against one another.
Dave Mathwin