J is for Jekyll and Hyde:
What is Jekyll and Hyde?
The phrase "Jekyll and Hyde" comes from the renowned Robert Louis Stevenson book "The Strange Case of Dr. Jekyll and Mr. Hyde," in which the kind scientist Dr. Jekyll transforms into the villainous Mr. Hyde.
In the world of finance, however, the phrase "Jekyll and Hyde" describes a stock market that appears to have a split personality, mixing good and bad character traits. Essentially, the name refers to unpredictable corporate earnings, with Jekyll standing for the good in a market — being placid, predictable, and favourable to trading gains — and Hyde standing for the bad— a market being volatile, unpredictable, unexpected, and typically dangerous to investors.
The twist lies in the fact that Jekyll and Hyde are one and the same person. When applied to the stock market, the implication is that one must be aware of the underlying risk despite the allure of profit, as both are in a state of perpetual coexistence. Indeed, Mr. Hyde may inexplicably emerge at any moment, wrecking a calm and rational market. Apart from the stock market, Jekyll and Hyde may also describe other aspects of the financial world. Notably, Jekyll and Hyde-esque behaviour may refer to a senior manager’s good and bad qualities, the important but incompatible goals of two officials of a company, and companies whose financial statements seem strong but actually conceal significant weaknesses.
Interesting Applications of Jekyll and Hyde to Behavioural Finance
According to the efficient market hypothesis, which states that the price of any stock at any given time will always be the same as its fair market value since it will be based on all the information then available, the Jekyll and Hyde situation describing seemingly unexplainable changes in market behaviour is without basis.
However, the study of behavioural finance, which is still in its infancy, aims to explain how irrational market swings are brought on by rational decision-making — or a lack thereof. It makes the case that common human behaviours, when motivated by anxiety and selfishness, may result in bubbles that develop and then unexpectedly burst. It is evident that the Jekyll and Hyde idea not only exemplifies this point but also supports it.
That’s all for this week's submission! Thank you for reading!