How Cobweb Theory Affects Markets

In their recent episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Tobias Carlisle discussed How Cobweb Theory Affects Markets. Here’s an excerpt from the episode:

Jake: Well, there’s this idea in economics called cobweb effects and what it is that, if there’s a lag at all in supply or demand how it shifts, then you’ll see the price move pretty dramatically, and it almost ends up making almost looks like a cobweb like a spider would build.

Tobias: Overcorrecting? Trying correct to the– [crosstalk]

Jake: Yeah, there is overcorrection. Supply, if you can’t put it on right away when demand is there, you’re going to have a price change, and then eventually, it catches up and overshoots, and now, it moves back the other direction. Equilibrium is only a thing that you just move through occasionally.

Tobias: Right.

Jake: I would expect more volatility and all this stuff than less. Even if it goes lower, maybe it goes lower, harder and it goes back the other direction, I think the stability is the rare occurrence and that this type of fluctuation is probably more than norm.

Tobias: I mean that run up in the 10-year, that’s an incredible ramp. Every time I check in, I expect that to have broken, but it’s still ramping up. I remember we were talking about going through two that was this year, wasn’t it?

Bill: Yeah.

Jake: It’s two weeks ago. [laughs] Oh.

Tobias: JT, you want to do your– I couldn’t even pronounce it.

Bill: Oh, do not. We something. The Bullard, the presentation, I think is worth looking at. You can find that, I’m pretty sure it’s stlouisfed.org. I had one more thing. Fuck it, doesn’t matter.

Jake: We’ll get back to it.

Bill: Yeah. Oh, my buddy is at trade oil. They say that there’s a lot less liquidity in the market right now. And I just wonder if there’s some combination of a lack of liquidity plus, some people that are– [crosstalk]

Jake: What does that mean? Supply for–

Bill: Just like traders.

Jake: Okay.

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