The “X” factor in financial models, or, Can Programmers predict Consumer Behaviour?

In the quest to being the first or fastest to get out of a free-falling share in the stock market, financial model formulas  are programmed into computers  by investors great and small hoping not to be the last one holding the proverbial “hot potato”. This is no different from the childhood game of musical chairs where the slowest one is left without a seat when the music stops and gets invariably eliminated.

Recent stock market crashes however suggest that perhaps there is too much dependency on these computer programmed models that in fact exacerbate the problem and what is actually a temporary financial blip suddenly turns into a full-fledged meltdown.

I/O psychologist Dr. Laurene Chua-Garcia of De La Salle University (garcial@dlsu.edu.ph) in the Philippines proposes in her research paper that an “X’ factor be included in these financial models to take into account the fact that  “it is human beings, after all, that consume a product or buy a home” and while assumptions as to how they will act as a group, as coined in the phrase “herd mentality”, is oversimplifying matters, the globalization of business, aided by a 24/7 internet community is rewriting economic models insofar as consumer behaviour is concerned.

Case in point: the Computer Tablet Industry, where Apple is currently dominating the field. The old adage of “me-too” with respect to designing and manufacturing a product which seems to be in demand (the Tablet) has now shown that that adage is flawed. While an announcement by other hardware manufacturers that they are coming out with a “me-too” Tablet would induce analysts to recommend a “buy” on their share price, a more prudent approach would be to examine why exactly are consumers from America to Zambia prefer the Ipad.

And the list goes on. From coffee to cars, the global consumer is now dictating the trend of the marketplace. Advertising hype is now subjected to a magnifying glass of consumer activism and blogs about whether a product really works or is a lemon can quickly spell doom for a product which does not deliver. The result? The product fails to sell, the manufacturer writes-off the investment, market share is lost and the company’s share price falls. A programmed computer model will then initiate a “sell“ order and the stock market responds punitively without really realizing that what caused the chain of events is a consumer trend which can actually be averted or addressed.

To rely then on present financial models without identifying and considering the “x” factor involved is to leave one’s self frail and unprotected to the new realities and vagaries of a global consumer market.