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B. Venkatesh

THERE are three ways to get things done. You can do it yourself or hire somebody to do it for you. Or of course, you can forbid your kids from doing it! Adults also display this childlike tendency to do something when prohibited from doing it. Your relative, for instance, may be devouring sweets only after she discovered that she has diabetes. How is this behaviour related to economics?

Economics is the study of the collective activity of human beings. And inherentto it is the study of childlike behaviour too. Such behaviour drives demand for scare or difficult-to-procure goods.

You may have consumed a box of Ferrero Rocher chocolates each time your friend returned with one after his trip abroad. Not any more. You know that this chocolate is available at the local store. Strangely, the ability to buy whenever you want lowers your consumption of the chocolate!

This is true in other aspects as well. If the government were to curb import of gold, there will be a sharp surge in demand for the yellow metal.

This will create the hawala route, where gold will fetch a higher price.

What does this all mean? You may say that stringent government regulations are counter-productive. By this logic, you may argue that short selling should be re-introduced in our markets. For the right to short sell may keep the market uptrend in check. Why?

Traders know that if prices were to move up sharply, others may short sell.

You could, therefore, argue that stock price movements may be measured if the right to short sell exists in the first place.

And going by our childlike tendencies, the desire to short sell may be less if that right exists!

(The author is Head, Research, Navia Markets)

More Stories on : Economics | Simple Economics

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