"Des waerelds doen en doolen, is maar een mallemoolen,"

"Des waerelds doen en doolen, is maar een mallemoolen," engraving from Het Groote Tafereel der Dwaasheid, 1720.

"The actions and designs of the world go round as if in a mill." South Sea bubble financial crisis.

Monday, August 15, 2011

Buy on the rumor - sell on the rumor, also

What happened to Société Générale lately fits right in between the Efficient Market Hypothesis and the madness of crowd, in what is still a no-man's land, in spite of all the welcoming push of behavioral finance to take into account human behavior.

The Daily Mail in the U.K. asserted on Sunday on 7 August 2011 that the bank was in a "perilous state and possibly on the brink of disaster".  Needless to say that in the present frantic environment, it triggered a whirlpool of speculation dragging down SocGen stock price. The Daily Mail admitted later the analysis was unfounded and apologized in a public statement.

Zachary Karabell's point is that rumors have a lot more weight when financial sectors lack credibility and no one trust it anymore: 
We have, in short, arrived in Looking Glass world where no one believes anything that anyone in finance-land says. And for that, we have Dick Fuld, Lehman Brothers, and the entire culture of Wall Street, Washington, and European finance over the past five years to thank. They are the inverse of the boy who cried wolf, and no one now believes that the wolf is not at the door.

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