A downward movement in stock prices, for example, generates chatter and media response, and reminds people of longstanding pessimistic stories and theories. These stories, newly prominent in their minds, incline them toward gloomy intuitive assessments. As a result, the downward spiral can continue: declining prices cause the stories to spread, causingstill more price declines and further reinforcement of the stories.
Sunday, August 30, 2009
REPOST: What causes bubbles?
In the second edition of our textbook, we discuss the feedback mechanism that causes asset bubbles: when price goes up (or down) in one period, expectations form that price will continue up (or down) next period. In today's NY Times, Bubbleologist Robert Shiller looks at the mechanics behind these feedback loops