This paper might be of interest to some.
Arthur
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http://www.dtc.umn.edu/~odlyzko/doc/mania03.pdf
Bubbles, gullibility, and other challenges for economics,
psychology, sociology, and information sciences
Andrew Odlyzko
School of Mathematics
and Digital Technology Center
University of Minnesota
[email protected]
http://www.dtc.umn.edu/~odlyzko
Preliminary version, August 5, 2010
ABSTRACT
Gullibility is the principal cause of bubbles. Investors and the
general public get snared by a "beautiful illusion" and throw caution to the
wind. Attempts to identify and control bubbles are complicated by the fact
that the authorities who might naturally be expected to take action have
often (especially in recent years) been among the most gullible, and were
cheerleaders for the exuberant behavior. Hence what is needed is an
objective measure of gullibility.
This paper argues that it should be possible to develop such a
measure. Examples demonstrate, contrary to the efficient market dogma, that in
some manias, even top-level business and technology leaders do fall prey to
collective hallucinations and become irrational in objective terms.
During the Internet bubble, for example, large classes of them first became
unable to comprehend compound interest, and then lost even the ability to do
simple arithmetic, to the point of not being able to distinguish 2 from 10.
This phenomenon, together with advances in analysis of social networks and
related areas, points to possible ways to develop objective and quantitative
tools for measuring gullibility and other aspects of human behavior implicated
in bubbles. It cannot be expected to infallibly detect all destructive
bubbles, and may trigger false alarms, but it ought to alert observers to
periods
where collective investment behavior is becoming irrational.
The proposed gullibility index might help in developing realistic
economic models. It should also assist in illuminating and guiding decision
making.
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The previous three papers in this series are available at:
1. Collective hallucinations and inefficient markets: The British
Railway
Mania of the 1840s
http://www.dtc.umn.edu/~odlyzko/doc/hallucinations.pdf
2. This time is different: An example of a giant, wildly speculative,
and
successful investment mania, B.E. Journal of Economic Analysis & Policy,
vol. 10, issue 1, 2010, article 60 (registration required)
http://www.bepress.com/bejeap/vol10/iss1/art60
preprint available at:
http://www.dtc.umn.edu/~odlyzko/doc/mania01.pdf
3. The collapse of the Railway Mania, the development of capital
markets, and
Robert Lucas Nash, a forgotten pioneer of accounting and financial
analysis
http://www.dtc.umn.edu/~odlyzko/doc/mania02.pdf
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Source materials for the Railway Mania and the Internet bubble are
available
at the web pages
http://www.dtc.umn.edu/~odlyzko/rrsources/
and
http://www.dtc.umn.edu/~odlyzko/isources/
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