Subject: Unintended consequences Stock Market

Posted by Warren Farr on 5/7/2010
In Reply To:Unintended consequences Stock Market Posted by Philip Abode on 5/7/2010

Message:

From a system dynamics perspective, it is the "strong job report" that disturbs a "system" that is otherwise in equilibrium. The disturbance propagates through the system's feedback loops (circular causal chains) to produce rapid movement in one or more system variables (such as the value of the DOW).

A causal thinking perspective helps us to realize that any single event, in absence of causal feedback loops, does likely have the power to produce such dramatic results. It is the iterative process of the loops (strong job report causes some people to buy some stocks which subsequently causes other people to buy more stocks of different types, which causes a perception that a recovery is at hand, causing more stock optimism, etc...). The stock market is a good example because everyone seems to hypersensitive to what everyone else is doing in hopes of gaining an advantage. The causal loops in this system are likely very fast.

Warren Farr