I'm looking for a superb essay I posted awhile back on German 1920's inflation, that has clear parallels. Meantime I found this post on Kindleberger's rationality theory that might be of interest right now.
From Charles Kindleberger's classic 1978 Manias, Panics, and Crashes talking about rationality of the individual, irrationality of the market:
1. People will change at different stages of the continuing process, starting rationally, and gradually at first, then more quickly losing contact with reality.
2. Rationality will differ among different groups of traders, investors, or speculators, including those at the earlier stages, and those at the later.
3. All will succumb to the fallacy of the composition , which asserts that from time to time the whole is other than the sum of the parts.
4. There will be a failure of a market with rational expectations as the quality of a reaction to a given stimulus to estimate the right quantity, especially when the are lags between stimulus and reaction.
5. Irrationality may exist insofar as economic actors choose the wrong model, fail to take account of a particular and crucial bit of information (*), or go so far as to suppress information (**) that does not conform to the model implicitly adopted.
(*) Clear and present danger of inflation, or how about the BOJ going away?
(**) Inflation reports, $55 oil, among others. |
