Stocks Analogy

Monday, February 19, 2007

photo from: senyon

If we all go for the blonde and block each other, not a single one of us is going to get her.
So then we go for her friends,
but they will all give us the cold shoulder because no one likes to be second choice.
But what if none of us goes for the blonde?
We won't get in each other's way and we won't insult the other girls.
It's the only way to win. It's the only way we all get laid.
- Nash, Beautiful Mind

I've been thinking that the factors affecting stock price differences can be explained through the analogy of traffic. Say for instance, there are two roads diverging (in a yellow wood - hehe). While the other one is clear, the traffic on the other road gets worse. Supposing that every car has GPS system which means that everyone is informed of the traffic ahead, then it is only logical that everyone would choose the road which is clear.

Now the traffic on the supposedly clear road gets worse because everyone chooses that road. Because everyone is informed, there is a shift to choose that supposedly clear road. And because of this, the supposedly clear road gets clogged even more than the first road where traffic originally got worse.

Well at least only for awhile.

Soon everybody realizes that everyone is choosing the "supposedly clear road" which would drive him or her to just stay or choose the original road.

Pretty much like the game theory of Nash.

I guess what I'm trying to say here is that a road becomes attractive because of the accessible information brought about by the GPS that it is clear. Same with the road with horrendous traffic, it becomes unattractive because of the information that traffic is worse there. But because of this information too, the clear road becomes unattractive because everyone chooses that road and then it gets clogged just like the original road. The information or behavior may get the blame but I think the bottomline is that there is always the possible discrepancy between what is actual and what is expected.

Same with stocks.