NEW YORK (TheStreet) -- If there was any remaining doubt about the efficient market theory's (EMT) death, Zynga
(ZNGA) effectively removed it last week.
Amazingly, some universities continue to teach EMT. If you're a student attending a university that teaches EMT, ask how it explains Zynga's 10% one-day drop because its CEO didn't inspire confidence during his interview at the Bank of America (BAC) Merrill Lynch Global Technology Conference. If you didn't listen to it, you can here.
EMT can't explain it, but behavioral finance can. Rationality left the building for Zynga's shares during Thursday and Friday trading and with raw emotion replaced it. Fear of ever-greater losses moved shareholders to create an avalanche of sell orders. Zynga closed Friday at $2.97, down nearly 22% for the year to date.
If you want to understand what drives stock prices, you're probably better off studying psychology instead of finance because sentiment, fear and greed dictate stock prices on any given day. Logic may rule over the long run but it can take an incredible amount of time to arrive. Logic isn't measured in days, weeks or even months, its journey is often measured in years.
On Thursday alone over 150 million shares traded hands and did the investors frantically placing sell orders think about who was on the other side? I think not. Because if they had the sellers may have remembered that for every trade there is a buyer and seller. For everyone that sold Thursday thinking that was the best price they could gain, someone was on the other side believing that was the lowest price they could purchase shares.
I bought shares on Friday because I don't believe the company changed.
Each business pays a discount on the total amount charged and that varies by the type of transaction and business. If you walk into Walmart (WMT) and buy an Apple (AAPL) iPhone for $100, Walmart may receive about $99. The merchant credit card processor and the credit card companies keep the difference. If you ever wondered how Capital One can offer points to cardholders for using its card, it's able to do so from the fees it charges business when you use it.