As impossible as it is for investors today to imagine the stock market in the 17th century, it would have been equally impossible, if not more so, for investors back then to have the remotest inkling of the technological wonder that is the modern day stock market.
However, while the markets have radically changed through the ages, investor behavior really hasn't changed at all, says Teresa Corzo, finance professor at the Universidad Pontificia Comillas in Madrid—and chances are it isn't likely to change in times to come.
Corzo—part of a recently minted research group at the Universidad Pontificia that focuses on behavioral finance—bases her argument on 17th century Spanish merchant, philanthropist and writer Jose de la Vega's "Confusion de Confusiones" ("Confusion of Confusions"), a book published in 1688 that many believe to be the first description of the workings of a stock market (Amsterdam's, in this case, since that's where de la Vega lived) and the behavior of those who participated in that market.
The book discusses, among other thing, how the volatility of the stock market can cause changes in the behavior of buyers and sellers, as well as the speculative aspects of trading stocks. De la Vega attributes this not only to the diverse, individual abilities of the actors, but also to a range of external influences.
Corzo and her colleagues came across the tome at a special exhibit on classic financial books at the Madrid stock exchange.
"While reading through it, behavioral finance kept coming to our minds," Corzo says. "We decided to read it very carefully [from that perspective], and not only did it have amusing depictions of investors in the 17th century, it also described the same behaviors that are being studied today in the area of behavioral finance."
Overconfidence, regret, loss aversion, a natural tendency to follow the herd: These behavioral traits were as prevalent in the 17th century investors de la Vega observed as they are in investors today, Corzo says. Although the market at the time was not even a fraction of what it is today, de la Vega still observed such traits as excessive trading, overreaction, underreaction and the disposition effect, where investors are more likely to quickly sell winning stocks but hold on to losers.
