Re: Re pension funds

[wfhummel@xxxxxxxxxxxxxx (William F. Hummel)]

On Thu, 09 Oct 1997 Oliver Kamm wrote:

>James R. Olson, jr. wrote:
>> If you reject the bandwagon effect, there's no way to account for bubbles
>> or panics, either.
>
>Sure there is, though I would question your use of the term "bubble", which assumes
>what it is you're trying to prove. If new information becomes available that causes
>the consensus of investors to revise their judgement of the stock market's value
>radically, then huge and rapid price movements will result. Consider what happened to
>the UK stock market when sterling left the European Exchange Rate Mechanism - not a
>bubble, but a rational response to new information.
------------
No, I'm afraid it is you who assumes what it is that you are
trying to prove.  By not accepting the concept of a "bubble,"
you assume away irrationality.  Thus the market is rational by
definition so bubbles can't exist, and you have come full circle.

New information becoming available does not explain the Dutch
tulip mania bubble or the South Seas bubble.  It was simple
greed, having nothing to do with a rational view of the market's
value.  How could a single tulip bulb be rationally viewed as
worth more than a house? The collapse of those bubbles was not
due to new information becoming available.  Everyone knew the
collapse would come at some point.  The panic that ensued was
fear of being left holding the sack.

Now one can claim that this is pure semantics, that both views
are valid given the right frame of reference.  In a purely
academic sense that is true.  But what practical use can be made
of treating those bubbles as rational market behavior?

William F. Hummel