https://padlet.com/5bt6s4rrsh/w8646zg2rtyn5y1a by Andrew Chen en-us 2021-08-25 16:38:55 UTC 2023-03-12 17:04:19 UTC hello@padlet.com 5bt6s4rrsh https://padlet.com/5bt6s4rrsh/w8646zg2rtyn5y1a/wish/1696421880 Performativity is...

Performativity is the concept that economics does not describe an external economy. Rather, economics creates the phenomena that is used to describe economy.

An example of performativity is...

An example is the capital-asset pricing model (CAPM). CAPM is a model used to evaluate risk in portfolios.

This is a good example because...

CAPM was revolutionary when it was first purveyed and it remains in usage today. Essentially, CAPM changed old thinking on Wall Street concerning risk and diversification. Old thinking dictated that the beta, or systematic risk of a portfolio was dependent on individual securities in a portfolio. CAPM said that only the systematic risk of an entire portfolio mattered because diversification would render the systematic risk of individual securities irrelevant. This model led to new thinking, creating specific economic behavior and phenomena; in other words, performing economy.

Sources

• https://www.investopedia.com/terms/c/capm.asp
• Mackenzie and Millo "Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange"
• A Random Walk Down Wall Street by Burton Malkiel, pages 209-213 (Book)
• https://www.econstor.eu/bitstream/10419/155847/1/vol06-no02-a6.pdf
• https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-capm-formula/

]]> 2021-08-25 16:43:51 UTC https://padlet.com/5bt6s4rrsh/w8646zg2rtyn5y1a/wish/1696421880 5bt6s4rrsh https://padlet.com/5bt6s4rrsh/w8646zg2rtyn5y1a/wish/1696436660 Rational choice theory is...

Rational choice theory refers to the belief that economic actors' actions are fundamentally rational. Actors make decisions by weighing the costs and benefits of each action.

An example of rational choice theory is...

Rational choice theory manifests itself in the main actions of stock market participants: buying or selling. If people think the cost of a security is low relative to its future worth, people will buy; conversely, if people think the cost of a security is too high relative to its future worth, people will sell or short-sell.

This is a good example because...

People engage in the stock market because they want to maximize their chances of making money. Investors often come up with a set of criteria that they believe can evaluate the value of one's stock relative to price. From their reasoning, they rationally make moves after weighing the costs and benefits. They buy a stock because they believe that it will be beneficial to them to obtain a stock for lower than what it is worth, and sell because they believe it is beneficial to cash out when the price is higher than the perceived value. Holding a stock, then, is done when it will cost more to sell than to hold.

Sources

• https://www.investopedia.com/terms/r/rational-choice-theory.asp
• Scott et. al "Rational Choice Theory"
• https://www.alamy.com/stock-photo-same-item-for-sale-at-different-prices-310864078.html

]]> 2021-08-25 16:51:01 UTC https://padlet.com/5bt6s4rrsh/w8646zg2rtyn5y1a/wish/1696436660 5bt6s4rrsh https://padlet.com/5bt6s4rrsh/w8646zg2rtyn5y1a/wish/1696440685 Sunk costs are...

Sunk costs refers to the cost expounded that cannot be recovered. The sunk cost fallacy, a related concept, refers to the tendency of people to hold onto and continue their sunk costs because of the initial cost invested.

An example of sunk costs is...

It is not uncommon for people to buy a stock that turns out to be a bad investment. The stock has not been making positive returns and upon further analysis, it appears the company behind the stock is losing their market to competitors.

This is a good example because...

Even the best and most legendary investors have all chosen a fledging stock at some point in their careers. However, what separates those who lose some money and those who lose their shirt is the ability to recognize and control sunk costs. If someone continues to hold on to this investment solely based on wishful thinking or the initial cost of investment, the sunk costs can continue to sink more.

Sources

• Thaler "Mental Accounting"
• https://www.investopedia.com/terms/s/sunkcost.asp#:~:text=A%20sunk%20cost%20refers%20to,spent%20and%20cannot%20be%20recovered.&text=Sunk%20costs%20are%20excluded%20from,the%20outcome%20of%20a%20decision.
• https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/sunk-cost-fallacy/
• https://bigthink.com/jazzy-quick/sunk-cost-fallacy-a-new-twist-in-cognitive-bias

]]> 2021-08-25 16:53:11 UTC https://padlet.com/5bt6s4rrsh/w8646zg2rtyn5y1a/wish/1696440685 5bt6s4rrsh https://padlet.com/5bt6s4rrsh/w8646zg2rtyn5y1a/wish/1696441370 Myopic loss aversion is...

Myopic loss aversion refers to loss aversion caused by frequently evaluating outcomes.

An example of myopic loss aversion is...

An example of this that manifests itself in investors of the stock market is as follows. The more someone follows the stock market ticker regularly, the more that person will be convinced that the stock market is volatile. Myopic loss aversion can affect the investor's choice when constructing their portfolio, for example the distribution between stocks and bonds invested.

This is a good example because...

Myopic loss aversion leads to people making non-optimal investment moves. Many investors wade into the stock market in the hopes of achieving long-term returns. Some know that it is better buy and hold or that trading less is better and even underline this as part of their investment philosophy. However, constantly checking their portfolio's current returns can muddy the goals they set out for, causing them to neglect their laid-down philosophy especially when things don't look that sunny at the moment.

Sources

• Thaler "Mental Accounting"
• Common Stocks and Uncommon Profits by Philip A. Fisher, pages 40-43 (Book)
• https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/myopic-loss-aversion/
• https://www.financialsamurai.com/historical-returns-of-different-stock-bond-portfolio-weightings/

]]> 2021-08-25 16:53:32 UTC https://padlet.com/5bt6s4rrsh/w8646zg2rtyn5y1a/wish/1696441370 5bt6s4rrsh https://padlet.com/5bt6s4rrsh/w8646zg2rtyn5y1a/wish/1696601142 Embeddedness is...

Because social relations are inherent in behavior and institutions, it is wrong to talk about them as independent from social relations. In terms of economic sociology, embeddedness refers to the marriage of social relations and economic activity, i.e they are not autonomous from each other.

An example of embeddedness is...

An example of embeddedness in stock market behavior is when someone buys the stock of a company at least partially due to the fact that someone in their close network is enthusiastic about the stock. This can be family members, friends, significant others, etc.

This is a good example because...

Granovetter says that economic action is embedded in networks. In many instances, people don't choose the best stocks based on their rational criteria (guidelines for choosing stock). It is possible that upon further looking, a more appropriate stock could be chosen. Still, many people act on stock market advice gleaned from the people closest to them in their network, offering undue influence caused by social relations. We can see that some stock market purchases don't add up to a purely anti-substantive view of economic activity.


Sources

• Granovetter "Economic Action and Social Structure: The Problem of Embeddedness"
• https://frugaling.org/worst-investment-tips/

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