The Extraordinary Popular Delusion of Bubble Spotting

From the WSJ:

Can you spot a bubble?

Ever since 1841, when a Scottish journalist named Charles Mackay published the book known today as “Extraordinary Popular Delusions and the Madness of Crowds,” the answer has seemed clear. If you watch carefully for signs of euphoria, you can sidestep the damage when markets go mad.

But bubble spotting isn’t as simple as Mackay made it sound—even, it turns out, for Mackay himself. Investors should always guard against the glib assertions of pundits who claim they can detect bubbles before they burst.

It’s also a reminder that expecting policy makers to predict the future by popping “bubbles in the making” is probably a bad idea.


After all, if identifying bubbles somehow became easy, investors would stop buying before prices got out of hand. So “being right about past bubbles does not automatically ensure that you will be right about the next,” says Robert Shiller, the Yale economist who called both the Internet-stock and real-estate bubbles.

That’s partly because many forecasters fall prey to overconfidence like Mackay’s and partly because the markets are always in flux.

“I’m very skeptical whether anyone can predict bubbles reliably,” says Mr. Odlyzko. “It’s an arms race: Anytime you come up with a bubble detector, people will try to get around it.”

Don’t try to spot bubbles, try to be in a position to make money when they burst. Best way? Surprise, surprise, surprise: trend following.

One thought on “The Extraordinary Popular Delusion of Bubble Spotting

  1. Even though there are 64 million empty apartments in China, that does NOT mean you should go out and do a Charge of the Light Brigade style short selling operation on everything in tradeable universe.

Comments are closed.