Wednesday, November 20, 2013

Are Bubbles Caused by Psychological Problems?

by Frank Shostak

According to the popular way of thinking, bubbles are an important cause of economic recessions. The main question posed by experts is how one knows when a bubble is forming. It is held that if the central bankers knew the answer to this question they might be able to prevent bubble formations and thus prevent recessions.

On this, at the World Economic Forum in Davos, Switzerland on January 27, 2010, Nobel Laureate in Economics Robert Shiller argued that bubbles could be diagnosed using the same methodology psychologists use to diagnose mental illness. Shiller is of the view that a bubble is a form of psychological malfunction. Hence, the solution could be to prepare a checklist similar to what psychologists do to determine if someone is suffering from, say, depression. The key identifying points of a typical bubble according to Shiller, are:

1. Sharp increase in the price of an asset.

2. Great public excitement about these price increases.

3. An accompanying media frenzy.

4. Stories of people earning a lot of money, causing envy among people who aren’t.

5. Growing interest in the asset class among the general public.

6. New era “theories” to justify unprecedented price increases.

7. A decline in lending standards.

What Shiller outlines here are various factors that he holds are observed during the formation of bubbles. To describe a thing is, however, not always sufficient to understand the key causes that caused its emergence.

Read the rest here.


  1. "economics is a separate discipline from psychology"

    "the use of psychology is counterproductive as far as economic analyses are concerned."

    That's for sure.
    Check out this bit:


    "Officially, all mental disorders are said to be chemical imbalances in the brain. Not just any imbalances, but specific ones. This is assertion is unproven. There is no evidence for it. [...] there are no defining physical tests. No blood tests, no urine tests, no saliva tests, no laboratory tests of any kind. [...] The whole thrust of official psychiatry and its allies is to monopolize their self-appointed territory and use all necessary means to eliminate the competition. This approach has nothing to do with science. It has everything to do with profit and fascist control."

  2. #7 is actually #0 (zero) and then goes like this:

    #7 People realize it's all bull sh*t
    #8 It all comes crashing down.
    #9 "Recession" ensues
    #10 Go to #0