I have just written a short piece on momentum trading on my blog. I'd be interested in your comments.
What Went Wrong with Economics
I think you are describing a branch of the topic known as speculation.
http://en.wikipedia.org/wiki/Speculation
If that is the case, then it explains why it is not seriously studied.
To explain what I mean, assume many people [say 75% of humanity] decided whether or not to buy stocks or houses by reading tea leaves or rolling dice. Would tea leaves then become a topic for serious economic research?
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It's easy to refute an argument if you first misrepresent it. William Keizer
"Would tea leaves then become a topic for serious economic research?". In a way yes. Economics is the study of the aggregate behaviour of the entirity of economic agents. You can't avoid taking into account the actions of significant sized groups just because you disaprove of what they are doing.
Momentum trading is of interest to traders, not economists. If you've found a pattern, by all means, exploit it and become rich. Rising prices do, indeed, discourage purchases - this is as true in speculative markets as it is in any market. You've never heard the term "overbought"? If it were not the case that rising prices discourage purchases (and can even encourage purchases), I would think that the stock price of Google would be close to $1M/share by now.
While people do, in fact, buy high and sell low, this is an unprofitable strategy. Those who engage in such strategies (whether based on momentum trading theories or otherwise) are dispossessed of their trading funds by those who follow the only profitable strategy of buying low and selling high.
Clayton -
"Rising prices do, indeed, discourage purchases" - really? Where were you in 2007? People were in a frenzy of house purchasing precisely because prices were rising so consistantly.
So then buy a house and become rich, my friend. After all, home prices must be rising faster than ever today.
"So then buy a house and become rich, my friend." - You have missed my point entirely. I am not advocating momentum trading, merely pointing out that a lot of it goes on and therefore its consequences need to be considered by economists.
a lot of it goes on
I think something like 90+% of all new businesses fail within 3 years. So yeah, lots of unprofitable ventures go on. Buying high and selling low on the stock market is just one of innumerable examples of unprofitable business strategies. Identifying common mistakes that lead to the collapse of unprofitable business ventures is certainly a valuable area of study.
mickanomics: [...] actions of significant sized groups[...]
[...] actions of significant sized groups[...]
To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process. Rabbi Lapin: "Let's make bricks!" Stephan Kinsella: "Say you and I both want to make a German chocolate cake."
mickanomics: "Rising prices do, indeed, discourage purchases" - really? Where were you in 2007? People were in a frenzy of house purchasing precisely because prices were rising so consistantly.
This is why it is important to remember that an individual acts, not a group. Within a group of people, there can be people who are encourage as well as people who are discouraged; however, to try to aggregate their actions can lead to wrong conclusions.
Clayton:I think something like 90+% of all new businesses fail within 3 years. [...]
What does this statistic mean? Are these business that go bankrupt, or shut down by the government, or "temporary/seasonal" business, or businesses that have pivoted?
@Muffinburg: I just take it to mean that people have lots of dumb business ideas to produce things that consumers aren't actually demanding.