This website uses cookies to ensure you have the best experience. Learn more

Irrational Exuberance And Financial Bubbles Essay

2918 words - 12 pages

Legends of the Mississippi and South Sea Bubbles have endured today as warnings against the fatality of irrational exuberance in financial markets. However, as details of these first financial crises are somewhat exaggerated, it has proven difficult for historians to separate fact from myth. The question remains as to whether investors behaved irrationally or sensibly in response to these events in the early eighteenth century.
It appears that a lack of investor sophistication and the adverse effects of herding are partly to blame for the unsustainable prices increases. Some argue that ‘irrational exuberance is the psychological basis of a speculative bubble’. However, many historians have rejected that investors acted in a fit of ‘irrational exuberance’, instead determining that they responded sensibly to the information available to them. It seems that a combination of these two theories would best explain the initial extraordinary popularity of these two schemes
It is important, before examining the events of the Mississippi and South Sea Bubbles, to approach the various definitions of the word ‘bubble’. According to the Dictionary of Political Economy (1926), the early modern definition of a bubble is as follows, ‘any unsound undertaking accompanied by a high degree of speculation’. This suggests that the investor basis his undertaking on an unwise or irrational assumption. However, Kindleberger appears to remove the presence of irrationality from the equation, defining a bubble as ‘an upward price movement over an extended range that then implodes’. It is therefore primarily unclear as to whether the very manifestation of a bubble presupposes the existence of investor irrationality.
Before categorising the victims of the earliest bubbles as either fundamentally sound or irrational, it is necessary to consider on what basis the speculators made their investments in the first instance. In economic booms, fraudulent behaviour increases and ‘swindlers’ come to the fore to exploit the greed of others. The primary purpose of the investment, genuine or fraudulent, could be an important factor in assessing levels of investor rationality. Speculators may have acted in irrational exuberance if they were susceptible to obvious swindles as opposed to those who participated in schemes that had (initially) honourable intentions.
Charles MacKay’s seminal work on popular delusions claimed that many historians of the time regarded John Law of the Mississippi bubble as ‘knave or madman’. Modern historians would argue otherwise and Kindleberger in particular maintains that the Mississippi bubble was not a swindle. Before his experimentation with paper money in France, Law had intentions for the same in his native Scotland. In Law’s Money and Trade Considered, he outlines the proposed supervision of the transition from specie to notes by a commission, accountable to parliament, with limited powers to coin notes, aided by a system of fraud...

Find Another Essay On Irrational Exuberance and Financial Bubbles

The 2008 Housing Crisis: A Brief Overview of Causes

1119 words - 5 pages , home buyers and lenders were not at all concerned about default. The attitude of buyers and lenders is explained by co-director of the Center for Economic and Policy Research, Dean Baker: Baker (2008) states: The irrational exuberance of a housing bubble created the climate in which homebuyers became eager to take on mortgages that they could not possibly afford and banks and investors were willing to make loans that couldn’t be paid back. If

Dance Girl Dance Essay

1022 words - 5 pages information further her own agenda. She uses the guise of “getting rid of” Mr. Harris, on Judy’s behalf, when in actuality, her true intention is to have him for herself. Bubble’s so called friendship with Judy is not immune to Bubbles’s bad behavior. Bubbles knows that Judy has feelings for Mr. Harris, and as soon and she finds out his financial status, she stops at nothing to have him for herself. This behavior has not changed. There are many women

Asset Price Bubble in Japan in the 1980s

7881 words - 32 pages IV discusses policy 1 Kindleberger (1996) employs the concept of euphoria to describe financial history of major asset price bubbles. Shiller (2000) uses a term of "irrational exuberance" to describe similar phenomenon. Garber (2000), however, offers a negative view against the explanation of bubbles from the viewpoint of mass psychology. 2 It is important to note that euphoria is completely different from a rational bubble as modeled in Blanchard

Asset Price Bubble in Japan in the 1980s

7881 words - 32 pages IV discusses policy 1 Kindleberger (1996) employs the concept of euphoria to describe financial history of major asset price bubbles. Shiller (2000) uses a term of "irrational exuberance" to describe similar phenomenon. Garber (2000), however, offers a negative view against the explanation of bubbles from the viewpoint of mass psychology. 2 It is important to note that euphoria is completely different from a rational bubble as modeled in Blanchard

The Formation of an Inefficient Market: Analysis of China's securities market

6045 words - 24 pages a newborn securities market with great intensity and passion that deserves a far more sophisticated, capacious and also tolerant playground.The thought of Irrational Exuberance takes this huge and abrupt downfall of securities market as a reasonable return to its intrinsic value. By looking at the shape of the Shanghai Stock Exchange Index, one can easily capture the resemblance between the rise and fall of China's securities market and that of

Wall Street 2

616 words - 3 pages dilemma. Through the combined excess and selfishness, of both the individuals and institutions involved, in the actions building up to this crippling situation Rand would have been disappointed in everyone involved, since they each acted only in their own self-interests without rationally considering the well-being of society as a whole due to what Alan Greenspan and Robert Shiller called “irrational exuberance.” Although Rand felt that “no man or

911 real estate

2303 words - 9 pages allowing the"bubble" and collapse 4continuous depreciation of the U.S. dollar. This series of monetary policy operations indeed played an effect. However, the U.S. economy get better from recession in a short term, while its side effects are increasingly apparent, the U.S. property market increasingly active, and then rose rapidly, there have been similar to the stock market's "irrational exuberance." situation. "In 2000 -2005 years, the rise in

Causes and Consequences to the Irish Recession

1401 words - 6 pages construction sector (O'Brien, 2013). The Irrational Exuberance in the Irish construction sector was one of the causes of the Irish recession. Prices on assets were over-inflated and banking lenders became reckless. The banking sector in Ireland had become over-exposed on its asset side of its balance sheet to domestic property and the construction sector and the liability side to EU borrowing markets (Kelly, 2009). Additional credit was created using

The I.P.O. Mania

3495 words - 14 pages they contribute to the market collapse. The answer is still a mystery; however, many factors played significant roles in the downturn. Initial Public Offerings did make a contribution to the rise and fall of the market. The "irrational exuberance" with which investors poured money into unproven Internet/Technology companies increased the valuation of stock prices(Mulligan 2). The general over-valuation of companies was a direct cause of the

Critique of Hitler's use of Machiavellan Principles

886 words - 4 pages hatred; because he can endure very well being feared." Hitler inspired such a fear into his enemies and such a passionate exuberance into his followers that, domestically, he had few threats to fear as long as he continued to win battles.One could compare the situation of the German people with that of the people of Milan in the late 15th century: "Louis the Twelfth, King of France, quickly occupied Milan, and as quickly lost it; and to turn him

global tsunami 2008

1488 words - 6 pages Index Excerpt from: Robert Shiller10. 2009. 『Irrational Exuberance』 2nd edition As clearly shown in figure two, beginning from 2000, home prices in U.S. had been increased exponentially. There are mainly two factors that led this increase in home price. One is a simple factor that can be easily identified from reading the graph of the figure 2. The building cost is decreased as shown in the building-cost index and the demand for house is

Similar Essays

Bubbles In Stock Markets Essay

1586 words - 6 pages ‘The stock market’s movements are generally consistent with rational behaviour by investors. There is no need to invoke fads, animal spirits, or irrational exuberance to understand the movements of the market.’ Discuss in relation to the information technology bubble and its collapse.      Introduction      In a perfectly efficient market, it is assumed that all investors have access to all

Another Headache For The Fed? Essay

1826 words - 8 pages forward guidance. It is unlikely that he will get his wish granted. Meanwhile, Richard Fisher, President of the Dallas Fed, is concerned about continued risks of widespread financial bubbles. He cites high levels of margin debt and narrow bond spreads as evidence of distorted financial asset prices. There are clear parallels with former Chairman Greenspan’s warning in 1996 of “irrational exuberance.” The views of former Chairman Greenspan still

Dot Com Crisis Essay

1243 words - 5 pages Boom, 1982-1999 (New York: HarperBusiness 2004) and Roger Lowenstein's broader Origins of the Crash: The Great Bubble & Its Undoing (New York: Penguin Press 2004). Cassidy is particularly valuable for the detailed financial data at the conclusion of the work.Cogent analysis of wider economic forces is offered in Irrational Exuberance (Princeton: Princeton Uni Press 2000) and The New Financial Order: Risk in the 21st Century (Princeton

Behavioral Finance: Heuristics And Biases Essay

850 words - 4 pages People come in all different shapes, sizes, and colors. If that is the case why are we so similar? The goal of this paper is to discuss people and their behavior as applied to finance. I will attempt to deconstruct human psychology to evidence their patterns. I was twelve years old when I was introduced to the stock market. 1998 had seen significant growth underpinned by a stable political environment. My young mind recalls the irrational