Nassim Taleb on How The Stock Market Works | Exploring Markets

Nassim Taleb on How The Stock Market Works

Nassim Taleb is a philosopher, trader, and author. In the stock market, he uses mathematical principles to guide all of his decisions. You may know him from authoring the now world famous book, The Black Swan. So how does he think about the stock market? Why do Black Swans happen? He once wrote:
"Now consider markets. We can say that markets aren’t the sum of market participants, but price changes reflect the activities of the most motivated buyer and seller. Yes, the most motivated rules.  
Indeed this is something that only traders seem to understand: why a price can drop by 10% because of a single seller. All you need is a stubborn seller. Markets react in a way that is disproportional to the impetus. The overall stock markets represent currently more than thirty trillions dollars but a single order in 2008, only $50 billion, that is less than two tenth of a percent of the total, caused them to drop by close to ten percent, causing losses of around $3 trillion.  
It was an order activated by the Parisian Bank Société Générale who discovered a hidden acquisition by a rogue trader and wanted to reverse the purchase. Why did the market react so disproportionately? Because the order was one-way  — stubborn — there was desire to sell but no way to change one’s mind. 
My personal adage is: The market is like a large movie theatre with a small door. And the best way to detect a sucker (say the usual finance journalist) is to see if his focus is on the size of the door or on that of the theater. Stampedes happen in cinemas, say when someone shouts “fire”, because those who want to be out do not want to stay in..." - Nassim Taleb, The Most Intolerant Wins: The Dictatorship of the Small Minority