Pop Psychology

[bemildred]

Here, some real empirical economics. Does this sound like what you see out in the real world? Why, yes, yes it does.

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Here, finally, is a security with security—no doubt about its true value, no hidden risks, no crazy ups and downs, no bubbles and panics. The trading price should stick close to the expected value.

At least that’s what economists would have thought before Vernon Smith, who won a 2002 Nobel Prize for developing experimental economics, first ran the test in the mid-1980s. But that’s not what happens. Again and again, in experiment after experiment, the trading price runs up way above fundamental value. Then, as the 15th round nears, it crashes. The problem doesn’t seem to be that participants are bored and fooling around. The difference between a good trading performance and a bad one is about $80 for a three-hour session, enough to motivate cash-strapped students to do their best. Besides, Noussair emphasizes, “you don’t just get random noise. You get bubbles and crashes.” Ninety percent of the time.

So much for security.

These lab results should give pause not only to people who believe in efficient markets, but also to those who think we can banish bubbles simply by curbing corruption and imposing more regulation. Asset markets, it seems, suffer from irrepressible effervescence. Bubbles happen, even in the most controlled conditions.

http://www.theatlantic.com/doc/200812/financial-bubbles

[eridani]

1. I thought that the point of regulation was to control the size of bubbles

--not to eliminate them.

[bemildred]

2. I thought the point of regulation was to prevent too much competition.

The point of the article, as I see it, is that if it looks like gambling, it probably is; and that "investment" and "gambling" and not the same thing at all.

[Odin2005]

3. Vernon Smith was a genius, and a fellow Aspie.

Too bad the nuts never listened.

[bemildred]

4. Yeah, he was like Galileo. "You mean you can just study these things yourself?"

No need to argue from first principles?

[Odin2005]

5. Yup! The Neo-Liberals are scared to death of the findings of economic psychology.

Much of it goes against their Free Market Fundamentalism. With all the pre-conceived notions contaminating Economics no wonder it took an Aspie to say that the emperor had no clothes.