The Chaos Theory

In a business trip to China with my business associate, where everyone goes nowadays; the translator also acted as the budget controller as well as an economist who explains all market aspects in China. He was explaining how China became the country and the economy that it is today, controlling almost 50% of the US Dollars. The most interesting point that he mentioned was when there was a need to withdraw money from the ATM at 1 PM and he said: “it’s not even worth trying”. He then justified his reaction by explaining that ATMs in China go ‘bankrupt’, if I may so, at almost mid-day. He went on to say: “can you imagine over 1 billion Chinese people withdrawing money at the same time?” Even though it sounded funny at that point; it raised a few questions in my head: what if that actually happens? What if those machines had to be reloaded with cash for a few consecutive days? Consequently, would banks go bankrupt if that happened?

Well, all that you need to do is to make people panic either through a rumor or bad news announcement. This actually happened in the UAE a long time ago, though it wasn’t a rumor. One of the local banks was facing issues that threatened its financial position. Once the news broke, people were rushing to all of the branches to get as much cash as they can. If you give that a second thought, even if the bank did not face the threat of bankruptcy; it would now. Normally, the central bank governing the banking sector would require a 10-20% reserve of total deposits maintained at all times. As a result, a bank can have 80% of its deposited cash amounts given out in the form of personal loans and corporate facilities. Assuming they kept 20%, which occurs only with a risk taking bank, a bank will definitely run out of cash and perhaps go bankrupt. People will be rushing to withdraw cash amounts keeping one thought in mind; “first come, first served”.

As mentioned above, such a scenario can be artificially caused by means of a rumor. The latter might have been what happened in stock markets when George W. Bush visited the UAE; after which a record loss of 30 billion Dirhams was announced in local media. Back then, a rumor was spread that the prices of stocks would go up. There were no reasons attached to such a rumor to justify it, but does a rumor need that anyways? All that you need to do is to specify one or two reasons that would sound reasonable to general audience who are the target market of whoever spreading the rumor, or perhaps the victims. After that, ‘word of mouth’, a powerful marketing tool in this part of the world; would do the rest. The best, also worst depending on whose side you are on, thing about a rumor is that you can hardly  trace it back to its source if it was only spoken and not communicated via other mediums like an email or the such.

To conclude, people are going to panic if a strong stimulus was presented into their environment. Based on that, the assumption of them thinking and acting rationally becomes negligible and the existing norm becomes what everyone is doing which is most probably not the rational thing to do. When investment knowledge possessed by people is limited, it is easier to manipulate them towards achieving certain desired outcomes. Since the public, collectively, can be holding tremendous amounts of stocks and cash amounts; this is quite serious. The next time you watch the news, note that only the widely spread rumors are mentioned before they are discarded to avoid a catastrophic impact on financial markets. On the contrary, other weaker rumors are not even mentioned as they are not likely to survive. Finally, think of what Apple does before it announces any new product. Anticipation, if any, stops you from buying competitor products.