Tuesday, March 22, 2011

Bubble Spotting

NEW HAVEN – People frequently ask me, as someone who has written on market speculation, where the next big speculative bubble is likely to be. Will it be in housing again? Will it be in the stock market?

I don’t know, though I have some hunches. It is impossible for anyone to predict bubbles accurately. In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion. A bubble forms when the contagion rate goes up for ideas that support a bubble. But contagion rates depend on patterns of thinking, which are difficult to judge.

Big speculative bubbles are rare events. (Little bubbles, in the price of, say, individual stocks, happen all the time, and don’t qualify as an answer to the question.) And, because big bubbles last for many years, predicting them means predicting many years in the future, which is a bit like predicting who will be running the government two elections from now.

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1 comment:

  1. Oh goody, another Shiller post so close to the last one.. I love the way he sees clearly that market forces are driven by interpretations / perceptions of facts rather than the facts themselves. Quit a few economists see this also but very few (almost none) go a step further to understand the first part deeply and then understand that the psychological/interpretive element can be influenced not only by the observation in question but by unrelated things including a feedback loop in the spreading of information around from one person to the next, making the feeling reinforced. If you can see the world in this way everything starts to be much less mysterious and the problems we get ourselves into start to become a little more predictable.