Saturday, August 23, 2008

Human Behaviour

What determines the price of something? Is it the intrinsic value of that item? What is the intrinsic price? In a world where currencies aren't backed by anything other than the word of the person who printed them, then I'd argue the value of something is the price you can get for it. It's what you can exchange it for. If you can exchange a handful of promissory notes from the Australian government for a little box of electronics from Japan/USA, then he value of the currency you handed over is one Xbox/Playstation.
And why is all this relevant? Well, in Global markets, the value of something is the price that someone is willing to pay for it, and that price is what they think the intrinsic value is. It's what they think they can exchange it for in the future. And the value that they attribute to it, isn't necessarily a mathematically derived formula. It is based on a belief that the item they are purchasing has value.
Where and How they find value for it, is determined by the individual, and the individual is not acting alone. They are driven by themselves, their peers and the ideas that are hard wired into their brain. As a trader you have to learn to take advantage of this. I highly recommend read Bob Cialdini's book, Influence: The Psychology of Persuasion that spells out clearly the different, yet predictable types of responses people have to certain situations.

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