The Madness in a Bubble

Posted by Lance Roberts

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No matter where you look in the market, there are signs of exuberance. As discussed previously, stock market bubbles are about psychology. Throughout history, bubbles are a function of the extraordinary popular delusions and the madness of crowds. 

Of course, that is also the name of Charles Mackay’s book, an early study in crowd psychology. The text, first published by Mackay in 1841, debunked everything from alchemy to economic bubbles. However, the three chapters on economic bubbles received praise from the likes of Michael Lewis and Andrew Tobias.

Essential is the understanding of the role psychology plays in the formation and expansion of financial manias. From the 1711 “South Sea Bubble” to the 2000 “ crash,” all bubbles formed from a similar “panic” by investors to chase ongoing speculation.

Importantly, in all cases, the speculators involved all thought “this time was different.”

What is essential to survive a bubble is first to recognize you are in one.

That may be the most challenging part of it all.

“Men, it has been well said, think in herds; they also go mad in herds, while they only recover their senses more slowly, and one by one.” – Mackay.

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