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Strategies & Market Trends : The Stock Market Bubble -- Ignore unavailable to you. Want to Upgrade?

To: Dale Baker who wrote (3141)	5/7/2000 9:34:00 AM
From: Tommaso	Read Replies (1) \| Respond to of 3339

From: Behavioral Decision Making Fall 1996 Jacob Freifeld Wednesday, December 04, 1996 The Theory vs. The Examples Throughout each of the above examples there are common features. Leverage and other financial innovations or "permanent advances" played a part in every speculative bubble. In every bubble the excess capital, optimism, hope and greed is blown off in a speculative frenzy, only to return again after years of economic contraction or tight credit. At the core of the speculative phenomenon is the individual, swept up in the euphoria of the crowd, attributing intelligence to those who make profits or becoming overconfident in their own judgment when they begin to profit from speculation. Conclusion What conclusions can be drawn from the these theories and examples? Clearly, the speculative bubble is as much an error of decision making and judgment as confusion of the inverse, hindsight bias, or the gambler's fallacy. In fact, hindsight, probability and gambling are integral parts of the speculative bubble. What makes the bubble more complicated, however, is the fact that it is a social phenomenon. As pointed out in the earlier discussion of the different speculative heuristics (or types of speculators), one person who believes an asset is tremendously undervalued will not cause a bubble, but rather a temporary up tick in prices. It is the group, the crowd that gives birth to a speculative bubble. This makes the task of improving judgment more difficult. It requires the individual to break away from the crowd and think logically about history, value and probability. Hopefully, examples from history such as those above will help people to begin to do just that, lessening the magnitude of speculative bubbles in the future.