I don’t trust the bubble narrative:

What the heck knows what the ‘real’ value of an asset should be? Even the basic simple models in the textbooks are tough to take to data.

So I agree with the linked piece:

Emanuel Derman’s Blog: Bubbles

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2 Comments on “I don’t trust the bubble narrative:”

  1. OmegaMom Says:

    Did you look into the “information cascades” model mentioned by this article?

    http://www.nytimes.com/2008/03/02/business/02view.html

  2. gh1f Says:

    The cascades model is really neat, and I think relevant to the housing price increases. Or perhaps even the tech boom.

    Here is one example of a cascade: You are trying to decide where to eat, and know a bit about the different restaurants. You see a big line at a restaurant that you are not sure of, but because of the big line, you decide to join the line, since other people might know something more than you do. The line is now longer because you joined. The next guy comes, sees the line, and makes the same decision as you, perhaps even ignoring his own information because the line is so long.

    The longer the line, the more people start disregarding their own information because the line is so long. But the then line gets longer, and so more people disregard their own information.

    The thing is that for each person, the decision to join the line is ‘optimal,’ but it is terrible in aggregate. Here is a situations in which combining everyone’s information–that is, using the aggregate information–you would know that that the restaurant sucks, but because everyone is under weighting their own information, the line is really long; the bad restaurant is way too popular.

    The key here is that you only see the line, not people’s information itself, since they make a discrete decision-this restaurant or that one.

    The story has a ring of truth for questions like where to move, what film to see, etc.

    This is related to Keyne’s ‘beauty contest’ story of stock prices a bit.


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