Bubbles / New paper / 14.10.2013
Bubbles
Vincent F. Hendricks
In Johan van Benthem and Fenrong Liu, eds, Logic Across the University: Foundations and Application—Proceedings of the Tsinghua Logic Conference, Beijing, 14-16 October 2013. Volume 47: Studies in Logic. London: College Publications: 509-513
The more you can create that magic bubble, that suspension of disbelief, for a while, the better.
– Edward Norton
The term “bubble” has traditionally been associated with a particular situation occurring on financial markets:
“A bubble is considered to have developed when assets trade at prices that are far in excess of an estimate of the fundamental value of the asset, as determined from discounted expected future cash flows using current interest rates and typical long-run risk premiums associated with asset class. Speculators, in such circumstances, are more interested in profiting from trading the asset than in its use or earnings capacity or true value”. (Vogel 2010: 16)
Textbook examples of bubbles include the Dutch tulip bulbs frenzy in the 1600s, the South Sea and Mississippi excesses about a century later, the US stock market as of 1929, the Japanese real estate and equity markets of the 1980s, the dot.com period and Internet stock boom of the 1990s, and of course the balloons, frenzies and speculative mania in the world economy leading to the global financial crisis of 2008 of which we are still in the midst of the aftermath.
In wake of the current crisis there have been many suggestions as to why financial bubbles occur, most of them composites in terms of explanatory factors involving different mixing ratios of bubble-hospitable market configurations and social psychological features of human nature and informational phenomena like the ones discussed in Infostorms.
One seemingly paradoxical hypothesis suggests that too much liquidity is actually poisonous rather than beneficial for a financial market (Buchanan 2008). Monetary liquidity in excess stimulated by easy access to credit, large disposable incomes and lax lending standards combined with expansionary monetary policies of lowering interests by banks and advantageous tax breaks and bars by the state, flush the market with capital. This extra liquidity leaves financial markets vulnerable to volatile asset price inflation the cause of which is to be found in short-term and possibly leveraged speculation by investors.
The situation becomes that too much money chases too few assets, good as well as bad, both of which in return are elevated well beyond their fundamental value to a level of general unsustainability. Pair up too much liquidity with robustly demonstrated socio-psychological features of human nature like boom-thinking, group-thinking, herding, informational cascades and other aggregated phenomena of social proof, it becomes a matter of time before the bubbles start to burst (Lee 1998) – at least in finance.
However, behind every financial bubble, crash and subsequent crisis “lurks a political bubble – policy biases that foster market behaviors leading to financial instability” (McCarty, Poole & Rosenthal 2013) with reference to the 2008 financial crunch. Thus there are political bubbles too … and other sorts as well.
There are stock, real-estate and other bubbles associated with financial markets but also filter bubbles, opinion bubbles, political bubbles, science bubbles, social bubbles, status bubbles, fashion bubbles, art bubbles … all pushing collectives of agents in the same (often unfortunate) direction; not only buying the same stock or real estate but also thinking the same thing, holding the same opinions, appreciating the same art, “liking” the same posts on social media, purchasing the same brand names, subscribing to the same research program in science etc.
Read the rest of the article:
“Bubbles”, in Johan van Benthem and Fenrong Liu, eds, Logic Across the University: Foundations and Application—Proceedings of the Tsinghua Logic Conference, Beijing, 14-16 October 2013. Volume 47: Studies in Logic. London: College Publications: 509-513
Joint work with Henrik Boensvang, David Budtz Pedersen, Pelle G. Hansen and Rasmus K. Rendsvig.
