Friday, September 27, 2013

Bubbles On the Brain

New Research from the journal Neuron suggests that financials bubbles have neurological underpinnings. The research suggests that during bubble periods in the markets, peoples' brain activate in areas suggesting value judgement processing and social issues.

Reading through the research is a little convoluted but still interesting. That said, I think the research can be more easily described by stating that people tend to follow others who executed operating models that work because it saves times and energy relearning a task that apparently works. It also makes sense in an evolutionary sense. You and caveman 2 hunt and forage for food. Caveman 2 knows where to find the best fruit and easiest prey. Are you going to set on your own to find your own (uncertain) sources of food or follow cavemen 2? Following caveman 2 expands less energy and increases your chance of survival.

The fact is, we are not that far away, temporal speaking, from that hunter and forager. Add in the modern social context of missing the boat, and bubbles become increasing hard for investors to not participate. 

This analysis does not even address the 'professional' aspects of missing the rise in asset prices and the extent it threatens careers. Far easier to be wrong in a group than stand alone with the wrong answer.



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