A Stock Market Rally, A Graph That Got Nowhere And....Your Prediction

Something curious happened on June 3^rd 2024, the day before the results of the Indian election were announced: the stock market shot up by over three percent.  This was on the back of a bunch of exit polls that predicted that the Government of the day would return to power with a glorious mandate.  

These exit polls, it was widely understood, were – ahem – not exactly the results of robust analysis and were largely the predictions of those who have some form of alignment, however tenuous, with the Government.  

Yet the markets shot up as a result of a flimsy set of reports that seemed to contradict all the trends on the ground.  Why?
 
To understand this, let me ask a question: do you consider yourself to be rational? 
Yes?
Somewhat yes?
 
Let us do an experiment, a simple one.  Imagine you are a farmer planning to grow wheat on your large farm, for the seeds of which you have just paid an advance of Rs Ten thousand.  I come over and show you a graph with the market price of wheat rising and falling over the last three years; it is a fluctuating line, with no clear trend that seems visible.  I now ask you to make a forecast of where the price would move next this season. 

As a farmer, of course, you will receive extra money if wheat prices go up.  And I go one step further: I offer you a reward if your forecast is correct. 

What will be your prediction, up or down?  Will the price increase or will it fall?  Note that you are not allowed to be an economist and say It Depends.
 
Read on after you have made your prediction….
Now, let me do this experiment with forty-nine others.  

And then.... I pick yet another random set of fifty people and tell them the same story, but put them into a different role: they run bakeries and wheat is their primary ingredient, so a drop in the price of wheat would yield a bonus. 

What is their forecast?  And I offer them too a reward if their forecast is correct.

 
In 2011, Guy Mayraz, a prof at the University of Oxford, conducted a variation of this experiment and here is what he found: the farmers hoped that the price of wheat would rise; as a consequence, they also predicted that the price of wheat would rise.  The bakers hoped for – and predicted – the opposite.
 
There is a name for this behaviour, isn’t it?  Wishful thinking.

So, were you - hand-on-heart - rational? 

Now, if what was seen in the markets on June 3^rd wasn’t wishful thinking, what was it?

Here is what happened on June 4th: