Economics of Crowd Behavior in Financial Markets

This report delves into the economics of crowd behavior within financial markets, using the 2008 subprime mortgage crisis as a case study. It explores how the 'wisdom of crowds' can lead to both beneficial and detrimental outcomes, particularly during market bubbles and crashes. The research methodology employs an interpretivist philosophy and inductive approach, utilizing secondary data and thematic analysis. The report examines the role of social influence on investment decisions, the impact of following market trends, and the importance of expert opinions, such as the Delphi technique, in mitigating risks. It concludes that while collective opinions can be valuable, they are not always reliable, and investors should exercise caution and seek expert advice to make informed decisions.

ECONOMICS-
FOLLOWING THE CROWD
CAN BE BENEFICIAL AS
WELL AS FOOLISH IN
FINANCIAL MARKETS
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TABLE OF CONTENTS
CHAPTER 3: RESEARCH METHODOLOGY.............................................................................2
Introduction............................................................................................................................2
Research philosophies............................................................................................................3
Research approaches..............................................................................................................4
Research strategies.................................................................................................................5
Research choices....................................................................................................................5
Time Horizon..........................................................................................................................6
Techniques and procedures....................................................................................................6
Research Limitation................................................................................................................8
Ethical consideration..............................................................................................................9
CHAPTER 4: DATA ANALYSIS AND FINDINGS...................................................................10
Introduction..........................................................................................................................10
Data analysis and findings....................................................................................................10
CHAPTER 5: FINAL DISCUSSION............................................................................................21
Introduction..........................................................................................................................21
Conclusion and discussion...................................................................................................21
REFERENCES..............................................................................................................................24
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CHAPTER 3: RESEARCH METHODOLOGY
Introduction
Research is an in-depth analysis of the topic through application of variety of tools and
techniques in a well formatted manner. Research methodology is a section which helped the
researcher in fulfilling all the above requirement for the study. It is a detailed plan and procedure
to analyse the research problem and developing effective design for the same in order to attain
the effective result (Green, Camilli and Elmore, 2012). For the present study this section will
help in developing a detailed analysis of various tools and techniques that the researcher will
implement in order to develop an effective result. The current topic of the research is to examine
the economics of wisdom of crowd within the financial market. In order to attain the research
aim, researcher will apply research onion which is a well-developed and formatted approach to
structure the study and analyse key aspects for designing it.
Illustration 1: Research onion
(Source: Green, J. L., Camilli and Elmore, 2012)
Research philosophies
According to Johnson and Christensen, 2008 research philosophy develops a cluster of
beliefs which helps in effectively structuring of the overall research and develops a formatted
measure to approach research problem. This outermost layers develop a strong basis for the
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research and analysis various means of data collection sampling etc. There are majorly two types
of research philosophies which are positivism and interpretivism. Positivism is an effective and
factual research philosophy in which researcher implement scientific measures and actual data to
attain results. Interpretivism on the other hand, is the philosophy where research findings are
derived through effective and in-depth interpretation. This method undertakes different social
perception and theories under consideration (McBurney and White, 2009). It helps in developing
a subjective research analysis.
The present study focuses on analysing the impact of wisdom of crowds on financial
market (bubble and crashes). In order to carry out the proposed research study interpretivism
philosophy will be applied. It will be an effective measure to deal will the social approach and
deliver a subjective result for the given study. Positivism on the other hand, is a rigid and
inflexible philosophy which demands strong scientific theories and factual figures for the
research. Current topic attempts to prove a social perception in financial market hence positivism
will not be effective for the same. It will be unable to focus on the social thinking and crowd
behaviour in order to deal with the research problems efficiently.
Research approaches
The next layer of research onion is research approach which develops an effective a clear
analysis about research design. It helps the researcher in properly structuring the study to attain
reliable research results for the study. Merriam, 2009 has segregated research approach into two
major segments which are effective and well developed for the research analysis. Inductive and
deductive research approach are different types of approaches which research implement to
design the study efficiently. Deductive approach is the on which demands specific design and
procedure to carry forward with the study. It focuses on developing a causal relationship between
variables to attain specific results. For this, researcher develop hypothesis on the basis of
research objective which develops a conceptual relationship with elements of the study. In
contrary to this, inductive research approach focuses on conducting the research to attain general
perception or theories which are applicable in similar industries or situations (Denzin and
Lincoln, 2011). This approach adopt research questions or theories to support the study and
resolve research problem.
The aim of the present study is to investigate financial markets where bubbles and
crashes influence profits and how following the crowd can be beneficial as well as foolish. The
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topic demands effective social influence for the research. Hence, in order to conduct the stated
research inductive approach will be applied. For this qualitative data will be used thus conclusion
will be drawn applying the same. Deductive approach demands effective formation of hypothesis
for the study which is ineffective for the present topic. The researcher will effective use
secondary data to analyse and evaluate the impact of social perception on overall profitability
within the financial market.
Research strategies
According to (Sharma, 2001) there are numerous ways of conducting research in order to
attain the effective findings which may help in resolving the issue. Research strategy helps in
finding significant differences in those ways and selecting the most suitable design for the study.
This helps in creating a well-developed research report for the study. Various types of research
strategies implemented while conducting the research are exploratory, descriptive, case study
analysis, casual research etc (Sharma, 2001). this helps the researcher in attaining effective
research goals. For the present study, exploratory research strategy will be applied. This will help
in effective developing base for conducting research on the basis of research questions and
seeking relevant results for the same. Moreover, this strategy will be effective to attain the aim of
the study in an efficient manner.
Descriptive analysis is a strategy which uses different theories and apply measures to
check the relevancy of the same. The present research is trying investigating the impact on
collective decisions on profitability in financial market. The research attempts to prove a
completely new theory. Case study analysis is a strategy where any particular case is taken as the
base and research is conducted on that segment to testify the application of tools and techniques.
This strategy is not relevant for the present topic hence the researcher has adopted exploratory
research method which is most effective and appropriate method to attain research result.
Research choices
This layer of the research study focuses on analysing different methods to conduct and
carry out the research in order to attain the effective and valuable results for the study. It focuses
on analysing the tools and measures implemented in order to conduct and carry out the study. .
Choice of the research is totally depends on the available time and money as well as aim and
objectives of researcher (Sharma, 2001). The present research focuses on investigating financial
markets where bubble and crashes influence profits and examining how following the crowd can
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be beneficial as well as foolish. In order to attain the stated research aim researcher has various
choices such as qualitative method, quantitative method, mixed method etc.
The present study will adopt qualitative research choices. This will be effective and
favourable for the present research topic. The study seeks to link the social perception with
financial investment patterns. The topic will be well defined and examined through application
of qualitative method. This method will be using interpretative measures to attain research
results. Moreover, examining and linking research patterns will be effective for attain the
research results. Quantitative method on the other hand demands wide quantitative data which
can be used for effective analysis and conclusions are mad using quantitative and statistical tools
such as descriptive statistics, mathematical models etc. In order to analyse the effectiveness of
wisdom of crowds the researcher will use the comparative analysis of secondary research data ad
effective conclusions will be attained for the same. Hence, qualitative analysis will be effective
and appropriate for the present study.
Time Horizon
This layer of research onion focuses on analysing the time horizon for which the research
will be carried out. Time horizon for the research helps the researcher in developing effective
measures to carry out the research in an effective and well developed measures. According to
Crowther and Lancaster (2012) time horizon of the research are characterised into two broad
categories which are cross sectional and longitudinal. This categorization helps the business unit
in developing an effective impact on analysing effective means of conducting the research.
Longitudinal researches as per the Daniel and Sam, (2011) are those which are carried out by the
researchers for a very long period. The topic of these researches are considerably wide and these
types of researches are generally stretched for a year or a decades even to attain the objectives.
Cross sectional research on the other hand are those researches which are carried to attain
specific objectives or purpose. The topic of these research is specific and generally focuses on
attain research aims and objectives for specific period of time.
The aim of the present study in to analyse whether the following crown is foolish or
beneficial for investors with reference to bubbles and crashes in the financial market. The topic
of the research is very confined and specific. The researcher will effectively carry out
exploratory research. The cross sectional time horizon will be applied for the study as the
research aim reflects specific research issues which could be analysed through specific data
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search and analysis. The longitudinal time horizon will not be applicable for the research as the
topic clearly specifies the research issue which is specific and limited. Repeated researches
cannot be carried out on the research in an extensive way. Hence, for the present cross-sectional
time horizon will be applied in the study.
Techniques and procedures
Data collection
Data collection is one of the most significant function of research study. It helps the
researcher to gather specified and significant information which reveals all facts and figures
related to the topic thus helps in attaining research results. According to AUTHOR data
collection is carried out using different methods and tools (Dey, 2002). Primary and secondary
method of data collection are the two most significant methods of data collection. Primary
method is one where the data is fresh and collected for the firm time from public. Researchers
collect this data using tolls such as questioners, surveys, interviews etc. both qualitative and
quantitative data is collected through this approach. It helps the researcher in attain appropriate
and reliable data for the research however social factors such as influence, fear, ignorance and
behavioural factor leads to the error in the data hence this may prove be a limitation of the
research (Kumar, 2014). Secondary research on the other hand is the one where past data is
collected and used for the research. Here the researchers collect the secondary i.e. past or used
data in order to carry out the research. This approach is highly reliable and authentic if sources of
data are valid.
For the current research secondary data collection measures will be used. The researcher
will collect the past data for the research in order to attain the research objectives. This will help
in attaining the research aim efficiently for the researcher. The research topic focuses on
applying the social perception in the financial market. For this purpose secondary data collection
approach will be highly effective to gain effective data results. In order to attain the research aim
the researcher will review the sub-prime crises of the year 2008. This case will help in
developing an effective clear understanding about the topic. Primary research will not be applied
for the study as the research topic specifically focuses on analysing financial market. Primary
data will not be useful to analyse the situation effective for the present research. Hence,
Secondary research has been used in the present research study.
Sampling
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In order to carry out the research in an effective manner proper and well developed
sampling measures are to be adopted by the organizations. The present research topic will be
attained by carrying out extensive research study on the topic utilising secondary research data.
The researcher have critically examined the subprime crises of the year 2008 in order to attain
the research objective in an effective and well developed manner. In order to carry out the
current research the researcher will undertake the banks which were highly impacted by the
occurrence of sub-prime crises in the year 2008. This will help in analysing the impact of social
influence on the investment decisions. Through analysing different scenario, researcher will
analyse the impact of decisions made by the crowd. Moreover, the research will use the
secondary data to analyse and evaluate the impact of following the crowd on the returns of the
investors.
Data analysis
This segment of the research is crucial and significant for effectively representing the
finding and developing an effective and clear understanding about the same. The two major
approaches employed for data analysis to attain effective results are quantitative and qualitative
method (Golafshani, 2003). Quantitative method involves critical analysis and interpretation of
figures and numbers, and attempts to find rationale behind the emergence of main findings. It
uses mathematical and statistical tools and techniques to attain the results for the research
problem. Data interpretation in this method is carried out through graphs and tables in order to
achieve research aim. Qualitative analysis on the other hand uses tools such as interviews,
surveys, case analysis or experiments to interpret research results efficiently.
The current research will use qualitative method in order to interpret data and attain
research aim. The research study will adopt thematic analysis measure in order to develop a well-
defined research structure. This method will develop research results and data analysis on the
basis of different themes which will be effective for attaining wide and effective research results.
As per the technique, number of themes regarding issue into consideration is prepared by the
researcher. This method will help the scholar to get deeper insights about the respective problem
as well as in making appropriate conclusion too.
Research Limitation
Accomplishing research in an effective manner poses wide challenges for the researcher.
It is not easy to effectively analyse and evaluate the data in order to attain the effective research
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results. To attain the research objectives in an efficient an effective manner the researcher has to
closely examine all the factors associated with the study (McMillan and Schumacher, 2014). The
present research was not a easy task to perform. There were variety of research limitation
associated with the same. The major limitations of the present research are as follows: Limited time: the availability of the time was one of the major issue to carry out the study
in an effective manner. Due to lack of time availability the researcher was able to carry
the research in a limited and defined spectrum (Saunders, 2003). Author has conducted
brief research on each and every aspect of the current subject. It can affect the quality of
work and final findings also.
 Choices of data collection: The choice of secondary data collection method will help the
researcher in attaining effective results however these results will be based on one issue
which took place in the recent past. The research result will thus be focused on the
limited analysis (Vaivio, 2008). Moreover, the other constraints of the research resulted
in limiting the stated factor in the effective manner.
Ethical consideration
An effective research study demands a definite analysis and research study. Often
common research errors or small ignorance may result in creating wide issues for the research
reliability and results. Different authors and researchers have developed a well developed
research study in order to attain effective research results. According to Goddard and Melville,
(2004) ethical consideration is one of the most crucial and significant factor for determining
effective and valid research results for the study. The present research has been carried out in an
ethical and reliable manner in order to effectively attain research results. All research data and
results has been carried out in a well developed manner for the present study.
The current study has followed all the ethical guidelines and principles to carry out the
present study. Plagiarism and data manipulation are the key issues involved in researches. For
the present study the researchers focused on collecting data in an effective manner and proper
citations and referencing has been done in order to avoid such issues. The data has been used in
an effective and actual manner without manipulation of any data. Moreover, all the data has been
collected from the reliable and authentic sources which enhances the reliability of the research in
an effective manner. All the secondary information has been collected from the publicly
available information and the researcher has not used any controversial data for the study. The
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conclusion and recommendations are based on the overall analysis hence the research is said to
be well developed and effective for academic as well further research reference.
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CHAPTER 4: DATA ANALYSIS AND FINDINGS
Introduction
Data analysis is a process of evaluating the data collected from different sources using
different tools and techniques in order to attain research results. This section of the study
develops an in-depth analysis of the research in order to attain the well developed research result.
Thematic analysis has been done using secondary data and a well designed data analysis has
been developed from the same. The above mentioned measure helped in attaining a appropriate
finding for the conclusions and recommendation section of the study.
Data analysis and findings
Theme 1: Overview of sub-prime crises
Sub-prime mortgage crises of 2008-10 exposed a major flaw in the credit lending policies
of investment bankers and credit lending agencies which created a wide impact on European and
American economy. In the year 2002-2005 high risk mortgages became available within the
economy. New financial products were used to apportion the risks with private-label mortgage-
backed securities (PMBS) providing most of the funding of subprime mortgages. These
instruments were considered risk free as they were insured by the financial lenders. It helped in
making houses available to the lower class and middle class people at a minimal interest rate
(Who Is To Blame For The Subprime Crisis, 2015). The availability of houses at low market
rates exploded market demand for the loans which were supplied at poor credit. Increasing
market demand developed a housing bubble within the economy which was hiked up in the year
2005. Poor credit within the market made the market collapsed and resulted in bankruptcy of
companies. The event was succeeded with much awaited economic recession within the market.
As per the researches central bank flooded the economies with capital liquidity in early
2000s through lowering rate of interest within the economy. The investors took riskier
opportunities in order to reinforce their returns on investment. Lenders on the other hand were
fulfilled with the availability of capital to lend which convinced them to take additional risks for
higher returns (Behind The Scenes Of Your Mortgage, 2015). Throughout the market funds were
flowed without well developed foundation. Fall in interests rates resulted increasing demand for
mortgages which resulted in enhancing the housing prices. Lenders followed the opinion of the
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crowd to perceive subprime mortgages as less risky relying on factors such as low rates, healthy
economy and credit worthiness of people. This resulted in rising mortgage origination highly.
The figure clearly represents mortgage origination from the year 1994-2006. It represents
that the amount in the year 2001 was $173 billion which outgrew to $665 billion in the year
2005. The immediate hike of 300% subprime mortgage resulted in creating huge vacuum within
the economy. The graph clearly represents a relationship between liquidity and loan origination
within the economy.
Theme 2: Wisdom of crowds played leading role in sub-prime crises
From the above overview it is evident that lenders of the loan played a significant role in
making economic revolution within the economy. Providing low rates mortgage loan developed
accumulated poor credit within the economy. Moreover, these actions developed a momentum of
demand within the society (Wisdom of Crowds, 2008). Home-buyers played a leading role in
spreading the fire of crisis within the market. They played a risky game by buying unaffordable
houses for reselling. These situations developed a new concept of mortgage and home-buyers
adopted non traditional measure of mortgage where the initial cost of buying the product was
minimum or considerably low (e.g. No down payment) and the introduction cost was low as
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Illustration 2: Subprime mortgage Origination
(Source:Who Is To Blame For The Subprime Crisis. 2015)