December 09, 2008
Bubbles Are A Feature
Virginia Postrel takes a look at economic experiments that show that economic bubbles are inevitable.
For more than two decades, economists have been running versions of the same experiment. They take a bunch of volunteers, usually undergraduates but sometimes businesspeople or graduate students; divide them into experimental groups of roughly a dozen; give each person money and shares to trade with; and pay dividends of 24 cents at the end of each of 15 rounds, each lasting a few minutes. (Sometimes the 24 cents is a flat amount; more often there's an equal chance of getting 0, 8, 28, or 60 cents, which averages out to 24 cents.) All participants are given the same information, but they can't talk to one another and they interact only through their trading screens. Then the researchers watch what happens, repeating the same experiment with different small groups to get a larger picture.Long before the housing market crashed nearly every one knew that housing prices were unsustainable. And yet despite that knowledge prices kept rising and investments in the housing stock kept rising. And not just in America where Fannie and Freddie were pouring gasoline on the fire. It was happening in Europe (worse than America) and China too. And while the housing bubble was in full swing we had an oil bubble at the same time fueled by peak oil scares - you know - buy now because we are running out and what is left can only get more valuable. I guess the Peak Oil folks peaked a little too soon.
My prediction for the next bubble? Alternative energy which is for sure going to be he Next Big Thing. Money has been pouring in to that sector and I'd say now was the time to get in. Then sell when your money has doubled. It may go higher but why get caught holding the bag when the crash comes?
Cross Posted at Power and Control
posted by Simon on 12.09.08 at 08:25 AM
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