In the land of financial markets, the phrase too big to fail has been brought into a new light. Two physicists from the Swiss Federal Institute of Technology in Zurich did a physics-based analysis of the world economy, finding in numerous cases that 80% of a country’s market capital consisted of only a few shareholders.
The research continued to explain that:
The most pared-down backbones exist in Anglo-Saxon countries, including the U.S., Australia, and the U.K. Paradoxically; these same countries are considered by economists to have the most widely-held stocks in the world, with ownership of companies tending to be spread out among many investors. But while each American company may link to many owners, Glattfelder and Battiston’s analysis found that the owners varied little from stock to stock, meaning that comparatively few hands are holding the reins of the entire market.
The investment takeaway is to target investor influence rather than market timing
“In this kind of science, complex systems, you’re not aiming at making predictions [like] … where the tennis ball will be at given place in given time,” Battiston said. “What you’re trying to estimate is … the potential influence that [an investor] has.”
The final results from the study will be published in an upcoming issue of the journal Physical Review E.
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This is a guest post from Alex J. Mann. You can subscribe to his blog here and follow him on Twitter here.