This article talks about hot stocks in the USA following the election of Barack Obama. The article indicated that while hospital stocks were on the rise, big health insurance companies’ stocks were falling. It predicted that this was in response to Obama’s healthcare reforms to come, which makes sense. Apparently gun stocks also have risen this year. Many speculate this is in fear of tighter gun laws to come. Meanwhile, financial stocks and coal stocks both took a dip, and this was attributed to Romney’s loss.
Beyond the topics of which stocks are hot and which stocks are dropping, the article lists many hot stocks and some that are on the decline. This list is very relevant to our class discussion about information-cascades. Even poorly informed stock buyers could buy stocks successfully based on the knowledge that more experienced stock buyers have implied with their purchases. For instance, with coal on the decline, even people who support coal companies would probably not buy stocks since they would almost certainly lose money. So an information cascade is overriding people’s personal information at this point.
Alternatively, this article points out the direct benefits of buying stocks. Because so many people are buying hospital stocks, they are almost guaranteed to increase in value, so it makes sense to buy stock. In terms of payoff, we can equate stock value to a function of z, the fraction of people buying this stock. As more and more people buy it, this stock will probably continue to rise until it reaches some sort of equilibrium with the price. Then the fraction will probably stay pretty consistent, experiencing downward pressure if more people buy, and upward pressure if people sell, causing the fraction to revert to the equilibrium. In theory, this would stay the same until the price changed or an upset pushed the fraction of buyers far enough away that the fraction cannot revert to a stable equilibrium. However, stocks are a good deal more complicated than this model, and their graphs of price versus fraction are probably more elaborate than the parabola we have seen in class.
Source – http://online.wsj.com/article/BT-CO-20121107-715249.html