Essay Example: Stock Prices and Social Dynamics

There is a relationship between stock prices and various social dynamics. The different social movements tend to influence the behavior of prices in the market, and this, at most times taken for granted by those involved in selling and buying speculative assets. Understanding market psychology is critical in understanding the various social movements and how they affect stock prices within the financial markets. It is, therefore, essential to include the impact of social psychology in the analysis of the financial markets.

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Understanding the relationship between stock prices and social dynamics is, therefore, essential in the analysis of the factors affecting stock prices in the financial markets. In the efficient market hypothesis, there is the free flow of information, which is critical for investors to make decisions on whether to invest in a given stock or not. Evidently, fashions, social movements, and fads are the dominant cause when it comes to the movement in stock prices.

In order to understand the social dynamics, analysis of the participants within the market is crucial when it comes to an understanding of the in-depth of human nature and behavior play a vital role. Various social movements have been found to affect the aggregate demand for shares in the market. In making a case against market efficiency, it is crucial to rely on n the evidence presented, stating that social movements affect stock prices, and this is because there exists no alternative when it comes to an understanding of human behavior. The efficient market hypothesis downplays the role of investors in the financial market and asserts that investors' psychology does not play a role in making price movements predictable.

The aggregate real stock prices are highly correlated with the aggregate real dividends over time. It is, therefore, essential to note that the aggregate stock prices are linked to the dividends. Stock prices tend to overreact to dividends, and in an efficient market model, one would anticipate the price-dividend ratio to go down when the real dividend increases and high when the real dividends decrease. Additionally, real price tends to be sluggish relative to the actual dividend in the market.

The behavior of the price-dividend ratio is due to the way the stock prices tend to overreact to the dividends. Some psychological model has shown similarity to the manner in which stock prices react to dividends. According to the psychologists, individuals respond to superficially plausible evidence despite having no statistical basis to justify the reaction. The overreaction should not, however, imply that the reason for the stock price movements is the firms earning or dividends.

Declaration of dividends is at the discretion of the managers, and this lures more investors to the company hence exerting pressure on the stock prices leading to their increase. Ideally, both the stock prices and dividends may be driven by the same social pessimism or optimism. The reaction of the prices to earnings could hence be attributed to the fact that the earnings are a result of the reports that are at the discretion of the accountants.

The patterns of the reactions of prices to dividends could lead to the reruns being forecastable. Investors base their decisions on the information they receive. Having information regarding possible future prices going up may trigger the investors to make the investment now and profit when the prices go up. The model applied in the analysis of the data is crucial to the researcher in understanding the relationship between the prices and earnings accrued to the investor.

The stock prices take a random-walk behavior since the aggregate demand emanating from the investors may not be entire. Ordinary investors overreact to the new available in the social constructs regarding the dividends or earnings, and this change in behavior makes the demand for shares relatively unpredictable. Additionally, fashions tend to be inherent to specific individuals making it more difficult to predict the trend. Testing the market efficiency by relying on the predictability of the investors' behavior may have little power in predicting the market movements, and this is crucial in preventing others from benefit highly from such opportunities. Notably, firms that set dividends in the market also tend to be influenced by the social dynamics that influence other firms in the market.

Fashions and attitudes influence investment in stocks, and these changes from one country to another. Dynamics in the political fields are crucial in influencing the decisions made by the investors in the market. For instance, the volatile political climate tends to scare away the investors, and since stock prices are sensitive to the behaviors of the investors, they fall. On the other hand, stable political climate entices investors to invest in a given country hence leading to an increase in demand for the share of key firms in the country (Robert, 1993).

The increased demand put pressure on the stock prices, causing them to rise. Attitudes of the investors towards investment is also instrumental in determining the stock prices in a given country. For instance, investors in West German tend to be more cautious since the stock market is very small. This translates to minimal trading or demand of the stocks from the investors leading to low stock prices.

Stock values and prices are vulnerable to the social movements since there are no theories that are acceptable and crucial in understanding the worth of stocks. The stock prices are underlined in the movement in the prices of other key economic variables such as oil prices. The ordinary investors do not have the objective ways of knowing the impact of such movements on the stock prices besides gathering information from others in the market in order to make informed decisions. They are faced with uncertainty as they cannot predict the movement in the stock prices. Due to the lack of evidence regarding prices of the speculative assets, investors derive their opinion regarding the stock prices and the market socially, meaning their opinions are influenced by what others think regarding the underlying subject. However, social judgments can lead to errors in decision making among investors.

Prediction of the future dividends by looking at the present value of the expected future income is erroneous as it ignores the fact that statistical tests do not indicate that returns are very forecastable. In the aggregate stock market, there is no evidence that the movement in dividends followed the movement in the stock prices. Investors who take opportunities quickly and make an investment immediately an announcement is made are likely to benefit, but this does not translate to the predictability of the stock prices.

The Stock Market is ignoring the economy

In the midst of the covid-19 pandemic, stock markets have continued to trade with the Dow Jones Industrial Average registering the best performance of two weeks since the 1930s, with the stock prices soaring as the economy struggles. The increase in share prices is brought about by the increased demand when the prices have gone down. Many investors tend to position themselves by taking advantage of the situation in order to benefit in the future. The aim is to get higher returns from the underlined stock when normalcy returns, and people are able to resume their normal lives. The action by the investors is due to the information received regarding the possibility of some states reopening. The increased demand for the stocks pushes the prices up, making them soar in the middle of a pandemic. Various companies under the Dow have recorded an increase in their index in the United States (Gunjan, 2020).

Information relayed to the public has been crucial in signaling to the investors the need to have hope regarding the return of the economy to normal. For instance, the action by the Federal Reserve to have the stimulus plan and the action by the government of the United States indicating their willingness to buoy the economy made the investors be optimistic of the future hence investing in shares when their prices are low. Investors are concerned with the return, and the action of the Fed played a massive role in the rebound. Additionally, the $ 2 trillion is meant to cushion the economy against the worst depression, and this restored confidence on the investors on the desire by the government to revive the economy.

Investors continue to invest in stocks without considering the effects brought about by the pandemic to the economy. Many jobs have been lost, prompting many people to file for the unemployment benefits, with the retail stores witnessing a decline in sales and profit. Contrary to the rest, the stock market has continued to soar higher due to the psychological nature of the investors' brains. The market is expected to reach its all-time high in the following year, explaining the need for the investors to be optimistic.

Other investors have continued to be cautious and pessimistic regarding how soon the economy can return to normalcy, making them invest in the traditionally safe assets such as gold and government bonds. The gains in the traditionally risky and safe assets suggest that many investors still remain concerned about the likelihood of an extended downturn. There exists certain organizations or industries within which investors have found refuge by investing in them. Big technological companies will ultimately revive and bounce back stronger as they have been key to the economy in recent years.

Despite the uncertainties associated with the economic recoveries, investors continue to buy stocks by "holding their nose, closing their eyes, and buying the stocks." The stocks of big technology firms continue to lure investors, and this indicates the behavior of the investors when surrounded by different situations. Ideally, investors are expected to be cautious during such times, and practice refrain when it comes to investing in the stock market. They act in the opposite direction, guided by their beliefs and psychology when it comes to making an investment.

Comparison and Connection between the Two Articles

In both the articles by Gunjan and Robert, a clear relationship exists between the stock prices and the return on the investments. Robert, in his article "Stock Prices and Social Dynamics," indicates that investors are motivated to buy certain stocks with anticipation that their prices will go up and profit thereafter. On the other hand, Gunjan (2020), in his article "The Stock Market is Ignoring the Economy," explains how investors are increasingly buying stocks in the middle of the pandemic with the hope that their prices will go up once the pandemic is over.

Investors rely on information at their disposal in making decisions on whether to invest I stock or not. They are influenced by their own psychology regarding market trends when making decisions. Evidently, both articles explain how difficult it is to ascertain the way investors behave. They react differently depending on how they view the situation and the information at their disposal. Other investors may be optimistic while others become pessimistic hence influencing the approaches they take in the stock market.

Social dynamics plays a key role in determining the behavior of the investors as it dictates whether they will make an investment or not. A certain condition such as political dynamics and the emergence of pandemics tends to impact the decision-making aspect of the investors in both cases. They make decisions based on the situation at hand with the desire to benefit when the condition changes.