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Peltzman effect and it's effect on Investing

Posted By: Admin

The Peltzman Effect is a theory which states that people are more likely to engage in risky behavior when security measures have been mandated. The Peltzman Effect is named for Sam Peltzman’s postulation about mandating the use of seatbelts in automobiles.

Peltzman theorized that the introduction of safety devices, like seatbelts or airbags, might not have the intended effect of reducing accidents. He proposed that because people feel  safer driving with a seatbelt, they would correspondingly drive with less attentiveness or at a higher speed leading to a higher number of accidents. Peltzman did not limit his theory to automotive safety or safety regulation in general; instead, he proposed that all government regulation created a disincentive towards its ultimate goal.

Upon review of the data associated with the introduction of the first generation of automotive safety devices, it was found that the Peltzman Effect was quite real. While the ratio of fatalities went down in accidents, the rate of accidents was found to rise enough to offset the decreased fatality rate. ( Source : https://whatis.techtarget.com/).

From an Investment standpoint the Peltzman effect has profound implications. The current stock market highs globally is related to the free cash that has been pumped into the various economies in enormous measures esp in the US and the western worlds to provide a success to overcome the economic losses of Covid related disruptions. This extra money has found its way to stock markets and over the past year the rally in stock markets worldwide has been quite astonishing. Therefore the  impression that common  investors have today is that  since stock  markets are high, maybe the covid has little or no  bearing on the economy. They continue to pursue huge investments into the markets under the belief that stock markets would continue to rally upwards despite the ground reality of a vicious second wave of covid 19 that is retching havoc in the lives of people and disrupting trade and industrial activity. It is quite possible that in the coming weeks the extreme optimism of the stock markets could give way to  pessimism leading to a correction  in the stock market. So instead of unbridled optimism this should be time for caution and care in managing one’s portfolios and investments esp relating to stocks.  

 




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