The three most popular stock market indicators in the second group are the Dow Jones Industrial Average, the Standard & Poor’s 500, and the Value Line Composite Average. The DJIA is constructed from 30 of the largest blue chip industrial companies traded on the NYSE. The companies included in the average are those selected by Dow Jones & Company, publisher of the Wall Street Journal. The S&P 500 represents stocks chosen from the two major national stock exchanges and the over-the-counter market. The stocks in the index at any given time are determined by a committee of Standard & Poor’s Corporation, which may occasionally add or delete individual stocks or the stocks of entire industry groups. The aim of the committee is to capture present overall stock market conditions as reflected in a very broad range of economic indicators. The VLCA, produced by Value Line Inc., covers a broad range of widely held and actively traded NYSE, AMEX, and OTC issues selected by Value Line.
In the third group we have the Wilshire indexes produced by Wilshire Associates (Santa Monica, California) and Russell indexes produced by the Frank Russell Company (Tacoma, Washington), a consult- ant to pension funds and other institutional investors. The criterion for inclusion in each of these indexes is solely a firm’s market capitalization. The most comprehensive index is the Wilshire 5000, which actually includes more than 6,700 stocks now, up from 5,000 at its inception. The Wilshire 4500 includes all stocks in the Wilshire 5000 except for those in the S&P 500. Thus, the shares in the Wilshire 4500 have smaller capitalization than those in the Wilshire 5000. The Russell 3000 encompasses the 3,000 largest companies in terms of their market capitalization. The Russell 1000 is limited to the largest 1,000 of those, and the Russell 2000 has the remaining smaller firms.
Two methods of averaging may be used. The first and most common is the arithmetic average. An arithmetic mean is just a simple average of the stocks, calculated by summing them (after weighting, if appropriate) and dividing by the sum of the weights. The second method is the geo- metric mean, which involves multiplication of the components, after which the product is raised to the power of 1 divided by the number of components.
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Stock Market Indicators, part 2
November 17th, 2010Incentives matter-choice is influenced in a predictable way by changes in incentives
July 4th, 2010This is probably the most important guidepost in economic thinking. It is sometimes called the basic postulate of all economics. As the personal benefits from an option increase, a person will be more likely to choose it. On the other hand, as the personal costs associated with an option increase, a person will be less likely to choose it. This guidepost also applies to groups of people, and suggests that making an option more beneficial will predictably cause more of them to choose it. Similarly, making an option more costly will cause fewer of them to choose it.
This basic idea is a powerful tool because its usefulness is practically universal. Incentives affect behavior in virtually all aspects of our lives, ranging from market decisions about what to buy to political choices concerning for whom to vote. If beef prices rise, making beef consumption more expensive relative to other goods, consumers will be less likely to buy it. The “incentives matter” postulate also explains why a person would be unlikely to vote for a political candidate who, if elected, would raise taxes to fund a new government program he or she didn’t like very much.
Most errors in economic reasoning occur because people overlook this postulate or fail to apply it consistently. With economic applications generally focusing on people trying to satisfy material desires, casual observers often argue that incentives matter only in cases of human selfishness. This view is false. People are motivated by a variety of goals, some humanitarian and some selfish, and incentives matter equally in both. Even an unselfish individual would be more likely to attempt to rescue a drowning child from a threefoot swimming pool than the rapid currents approaching Niagara Falls. Similarly, people are more likely to give a needy person their hand-me-downs rather than their favorite new clothes.
It is clear that incentives, whether monetary or nonmonetary, matter in human decision making. People will be less likely to walk down a dark alleyway than a well-lit one; they will be more likely to take a job if it has good benefits and working conditions than if it doesn’t; and they will be more likely to bend down and pick up a quarter lying on the sidewalk than they will a penny. Even a person who normally bends down to pick up pennies on the sidewalk probably would be less likely to if late for an important appointment, or on a first date.
Just how far can we push the idea that incentives matter? If asked what would happen to the number of funerals performed in your town if the price of funerals rose, how would you respond? The “incentives matter” postulate predicts that the higher cost would reduce the number of funerals. While the same number of people will still die each year, the number of funerals performed will still fall as more people choose to be cremated or buried in cemeteries in other towns. Substitutes are everywhere-even substitutes for funerals.