In the wake of the Nasdaq's precipitate decline, investors who were once boundlessly exuberant are now hopelessly downcast, convinced that the market is doomed to an endless series of boom-and-bust cycles. Adroitly synthesizing work from the fields of economics, evolutionary psychology, and social science, Hassett shows that the kind of frenzy we saw at the height of dot-com mania, far from being characteristic of financial markets, is actually relatively rare. A bubble, he argues, is almost always the product of technological upheaval, which creates great economic potential but also great economic uncertainty. Investors looking for guidance take their cue from each other, encouraging a herd mentality, and individually rational behavior creates a collectively irrational outcome. Still, for all the havoc that bubbles can wreak on our portfolios, they can also provide collective gains: the railroad bubble gave America its first transportation network, and we will be reaping the technological benefits of the Internet boom for decades to come.
Copyright © 2005 The New Yorker
“Financial bubbles are serious business. But in the hands of Kevin Hassett, they’re also a blast. His Bubbleology
is as enlightening as it is fun to read.”—Jeffrey H. Birnbaum, Washington, D.C., bureau chief of Fortune
magazine and contributor to Fox News Channel