In the 1960s, a new term crept into sports reporting in the United States. This term came to describe the extra energy a team would show when they were 'in the zone'. They were said to have the driving force of momentum on their side - "The Big Mo"It didn't take long for this term to catch on and it has since come to be used in all sorts of different contexts including political campaigns, social upheavals and economic cycles as well as (you guessed it!) financial bubbles.
Perhaps most notably, the term was used by Mark Roeder (a former UBS Bank exec.) in 2010 when he stated that "The Big Mo" played a pivotal role in the 2008 global financial crisis:
"...recent technological advances, such as computer-driven trading programs, together with the increasingly interconnected nature of markets, has magnified the momentum effect."
Similarly, The Economist published an article entitled "The Big Mo" (available here) which discusses how momentum in markets might explain financial bubbles and contravene efficient markets hypothesis.
Whilst contributions to the concept of momentum are numerous, the best known interpretation is Sir Isaac Newton's Second Law of Motion, which takes the form:
F = ma
where F is the force, m is mass and a is acceleration.
The intuition here is that as mass or acceleration (or both) increases, the greater the force. That is to say, if an object is bigger, or moving with a greater acceleration, stopping it will require greater force.
In 1982, psychologists John Nevin, Charlotte Mandel and Jean Atak, wrote a paper called "The Analysis of Behavioural Momentum", in which they explored why certain behaviours can become persistent over time. They developed a method of applying Newton's equation to human behaviour and the way we resist change.
Could this be applied to financial markets? What if the object (F) is the force with which traders hold a certain belief e.g. the housing market is the most profitable and the least risky market. The mass (m) could be the number of traders and the acceleration (a) the rate of trades taking place. As more and more traders come around to thinking this way, the asset price soars but so does F. That is to say, if an idea already has momentum amongst traders, it will take a lot of convincing to change their minds depending on how many of them there are and how much trading they're doing.
If this is in fact the case, the next logical question is what causes the idea to spread in the first place?
