2017-04-30

Can the Central Bank Boost Social Mood?

The stock market is an excellent social mood signal because traders and investors make millions of real-time transactions. Social media theoretically allows for even faster and more accurate feedback, but for now the stock market remains a great signal.

The stock market says social mood has never been higher. In contrast, many events point to 2000 as a peak in social mood, with the last successful round of free trade and the launch of the euro among the most prominent events. In the ensuing years, approval of EU membership was voted down at time, immigration policies began to be restricted, and after 2008 these trends accelerated amid rising nationalism.
Credit growth confirms a peak around 2008.

Why might the stock market be at a new all-time high when other indicators tend to suggest the top was put in a decade or two earlier?

Perhaps the stock market is not only a mood indicator, but also serves as feedback for the general public. Whether they public believes it consciously or not (many in the financial markets consider it an indicator), the stock market serves as a barometer of confidence. It is theoretically possible to jam the market signal by artificially supporting the market. Anyone who is in the market would feel a boost of optimism that speads into the wider society. In contrast, buying a home or investing in a business are less sensitive to emotions. They aren't immune to them, but outside of the housing bubble, home prices do not behave like stock prices.

Will the good times last?

NY Mag: A Classic Psychology Study on Why Winning the Lottery Won’t Make You Happier

In 1978, a trio of researchers at Northwestern University and the University of Massachusetts attempted to answer this by asking two very disparate groups about the happiness in their lives: recent winners of the Illinois State Lottery — whose prizes ranged from $50,000 to $1 million — and recent victims of catastrophic accidents, who were now paraplegic or quadriplegic. In interviews with the experimenters, the two groups were asked, among other things, to rate the amount of pleasure they got from everyday activities: small but enjoyable things like chatting with a friend, watching TV, eating breakfast, laughing at a joke, or receiving a compliment. When the researchers analyzed their results, they found that the recent accident victims reported gaining more happiness from these everyday pleasures than the lottery winners.

This is how the study is usually written about, in a "gee whiz, ain’t that counterintuitive?" kind of tone. But what’s really striking when you look at the results reported by the researchers is how close their answers actually are: On average, the winners’ ratings of everyday happiness were 3.33 out of 5, and the accident victims’ averaged answers were 3.48. The lottery winners did report more present happiness than the accident victims (an average of 4 out of 5, as compared to the victims’ 2.96), but as the authors note, “the paraplegic rating of present happiness is still above the midpoint of the scale and … the accident victims did not appear nearly as unhappy as might have been expected.”

This is partially because of what’s become known as the hedonic treadmill, or hedonic adaptation, that annoying tendency humans have to get used to the things that once made them happy.
Other studies have since found that there is some long-term improvement from winning the lottery (having money means better medical care, for example), but not to long-term happiness.

If the stock market has benefited the most from central bank support, the next market downturn could be extra brutal as prices revert to not only a valuation mean, but the wider society's social mood.

This is a pressing question because the market is approaching an intermediate- or long-term peak.

Hussman: Exhaustion Gaps and the Fear of Missing Out

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