Not so Tiny Bubbles

| 2 Comments

A nice article by Virginia Postrel in the Atlantic, writing about the behavioral economics of asset bubbles. Pop Psychology .

In short people are irrational, and one might add backward rather than forward looking.

I think the backward looking nature of humans also explains infrastructure bubbles, growth is extrapolated from past trends, and as we rise the logistic curve past the midpoint, this overstates future growth. See The Transportation Experience for details.

The text can be found on p.253, see the Google Books version for discussion.

2 Comments

I'm not sure that the takeaway from Virginia Postrel's pieces is that humans are irrational or backward thinking. In the early stages of a bubble, you would probably feel pretty foolish to dump your assets because they are overvalued based on fundamentals. America Online was probably overvalued at $2 in the 90s, but you could have made gobs of money all the way up to $100. In that sense, it was perfectly rational for an individual to take advantage of such a market.

The real problem, as I read it, is more a tragedy of the commons, where everyone, acting in the own self-interest, push asset prices up to an unsustainable point, where they eventually have nowhere to go but back to the fundamental value.

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Alena

David Levinson

Network Reliability in Practice

Evolving Transportation Networks

Place and Plexus

The Transportation Experience

Access to Destinations

Assessing the Benefits and Costs of Intelligent Transportation Systems

Financing Transportation Networks

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This page contains a single entry by David Levinson published on December 7, 2008 10:40 AM.

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