Bubbles, Rationality and Trend Following

Human nature isn’t rational. It blows bubbles and then pops bubbles—and we can see this going back hundreds of years seen across calamities that we have all heard about:

• Dutch Tulip Mania (1634-1637)
• The South Sea Bubble (1716-1720)
• The Mississippi Bubble (1716-1720)
• The British Railway Mania Bubble (1840s)
• The Panic of 1857
• The Florida Real Estate Bubble of the 1920s
• The Stock Market Crash of 1929
• The 1973–74 Stock Market Crash
• Black Monday – the Stock Market Crash of 1987
• Japan’s Bubble Economy and Crash 1989-current
• Dot Com Bubble (1999-2002)
• United States Bear Market (2007-2009)
• Flash Crash (2010)
• Chinese stock market crash (2015-16)
• Brexit (2016)

And on and on…

But it’s beyond simply not rational. Those events, the human action driving those booms and busts, are best described by academia’s Prospect theory, cognitive dissonance, the bandwagon effect, loss aversion and assorted heuristics in judgment and decision-making—to name a few of the hundreds of biases inherent in our lizard brains.