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OP-ED: What Apple can teach us about how we function

  • Published at 02:50 pm August 8th, 2020
Mysterious forces at work BIGSTOCK

Humans are not always logical and rational when making decisions

Apple has split its stock for entirely no reason whatever. Yet the stock rose as a result of it doing so. There's something not quite logical about this -- which should be obvious, for we humans aren't always entirely logical. 

The corollary of this, often enough, is the claim that those who know better than we do should plan everything for us so that the world will be better. This being rather the wrong answer, for we tend to end up not acting according to the plan. Rather better is to work out where and why we humans are illogical, and then make use of that in constructing our plan for how the world should be.

Apple's share price was up 6% when they announced that each individual share would become several. In logic and theory, this shouldn't make any difference. Apple the company is still doing the same thing and how many pieces of paper make up the ownership of it should change the value of each piece of paper, but not that of the whole. And yet this isn't what actually happens out there in financial markets. We find that when an American company does a stock split like this to get prices into around roughly the $10 to $100 range, then the price goes up. 

It's also possible to do the reverse, a “consolidation” and say that 10 shares are now one, just to invent some numbers. If this brings the stock price up into that range, then again the value of the company as a whole tends to rise. So, companies where the stock price soars above $100 tend to have splits; where it falls to a few dollars or below then they consolidate. The NASDAQ market will even de-list a company from the exchange if the stock price remains below $1 for too long.

But why is this? The answer being it's just some peculiarity of investors. There's no reason for it other than the fact that that's the way people seem to work. We can even test this -- on the London market, the range is between £1 and £10 (say, $1.25 and $12.50). That's just how folks are. Nothing rational or logical about it at all.

There are many such examples of local habits. One that has struck me as I've moved around the world is who pays for the birthday drinks. In some countries, the friends take the birthday person out. In others the birthday person pays for all the friends. This can be -- has been -- socially embarrassing when expecting one version of bill presentation and finding myself in a place that uses the other. There's nothing right or wrong with either version either; it's just that different places do it in different ways.

The important point underlying this is that varied societies do have these conventions and habits, which those of an orderly mind often want to subvert by planning matters onto a more logical basis. The problem being that this often doesn't work. Sure, who pays for the birthday party isn't important on the societal level -- only at the time the bill is presented. People like stock prices to be in a certain range well -- so what? 

But there are those who say that we shouldn't think so much about what's in it for me. That we should be more communal, more worried about society as a whole rather than ourselves or the narrow circle of our family. Well, OK, perhaps we should be, but that's not actually the way that we work in general. The very few who do think of other people and their needs as being as important as their own, we generally end up calling saints. They are rather few in any generation.

Which is where the problem of planning comes in. The purpose of the planners is to overcome those irrationalities. And yet the plan is always imposed upon us humans, the very people who have those irrational habits. This is long before we get to the obvious times that the planners themselves are deluded. The problem with the plans being that they're designed to make us different from the way we are. Almost as if it's us that has to buck up and be worthy of the planned society.

Actually, that's entirely true too. The communists had that wondrously planned society over in Russia and they very soon had to call for the arrival of the New Soviet Man to make it work. They'd done that designing to override how people work rather than to work with the grain of how we do.

That Apple is worth more after doing something as silly as changing the number of pieces of paper that makes up the ownership of Apple is proof that we humans aren't entirely rational. Given which, it's not going to be possible to direct us by rational plans, is it?   

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.

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