The recent craze on financial markets made me think about the markets and decision making.
First, why would somebody buy an asset on financial market (stock, bond, crypto and other currencies, derivatives)? I guess there are 3 reasons:
- investors (people, who make money investing other people's money),
- savers (people, who invest for the reason of dispersing their wealth - for maintaining their current value), and
- speculators (people, who invest due to expectation of further growth).
In principle the price of any financial instrument consists of the "real value", which is "corrected" with expectations. It is hard to calculate the real value, but for the sake of keeping it short, let's say that such estimate shall take into account the asset value, income, cash-flow, profitability and indebtedness. The expectation part corrects the real value with investors' expectations on the mentioned criteria that help us estimate the real value.
The bubbles start forming when speculators invest because they expect the rise in the value of financial instrument per se, and not the underlying factors that determine the real asset value.
I believe that speculators have hijacked many assets on the market in the last year, especially the last few months of 2020 and beginning of 2021. The Bitcoin rose 400% YoY. And not just Bitcoin. There are many stocks whose growth seems not to be correlated to their actual financial results (e.g. Tesla: 800% growth YoY).
Now, why would somebody even become a speculator? Why is it that some of us never invest in financial assets, while some are very quick to buy into the latest hot stuff?
I think we all take the money as very important (the one who tells you otherwise is either ignorant or lying). We all want to make so called "fuck you money" (FYM) - the amount that would enable us to spend the rest of our life with the same amount of comfort even if we didn't work a day in our life anymore. And not just that; we want to make it soon enough, so that there will be enough time to enjoy our life. The FYM amount and the time horizon in which we want to achieve it differs wildly, but the logic stays the same.
Where we differ is our belief, whether we can reach the FYM on our own in wanted time span. If we believe that we have the ability to make it (soon enough), we will work hard and invest in ourselves (improving our skills, investing in our companies). If we believe that we don't have the ability (that we aren't smart/ persistent/ hardworking... enough) or that it will take too much time, we will try to make it by speculation. This could be buying Bitcoins or gambling.