Saturday, September 10, 2011

A Short History Of Financial Euphoria: Chapter 1

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

There are two types of attitudes common to participants in speculative manias. The more numerous group contains those who believe some cause (e.g. a new tax policy) has resulted in permanently high or rising prices for an asset class. In the minority are those who perceive the speculation, but believe they can ride the rising tide and exit before a bust occurs.

Both groups are psychologically affected by their new-found wealth; there comes a belief that the increase in wealth is the result of superior insight or intuition, as opposed to luck or speculative excess. This blocks the ability to perceive the irrational mania that is so easily visible once the bubble has popped.

Along with this comes a strong tendency to condemn those who express doubt. It is felt that those who don't believe in the new paradigm are for some reason unable to grasp the new circumstances that have led to the sustainability and security of the increase in asset prices. Galbraith discusses a number of such examples, including circumstances where he himself has been the object of ridicule for calling manias in the midst of their occurrences.

1 comment:

Anonymous said...

Once burnt twice shy however there is always a new generation who have to be fleeced before they learn hence financial euphorias will always be with us.