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Assorted links
1. Virginia Postrel on the economics of bubbles.
3. Frog picture; recommended.
4. Robot density.
5. We'll do the next two chapters of Keynes on Monday.
Posted by Tyler Cowen on December 12, 2008 at 10:38 AM in Web/Tech | Permalink
Comments
An ungated version of Vernon Smith paper referred to in the Postrel article is here: http://people.exeter.ac.uk/dgbalken/EE08/smith.pdf
Posted by: michael webster at Dec 12, 2008 10:54:25 AM
The Postrel article is fascinating. I feel somewhat vindicated although it sounds like experts do better because of "raw experience" rather than "careful, rational thought," so that they'll screw up in novel conditions too.
1) If there is a natural tendency towards bubbles should there be tighter leverage requirements in novel asset markets?
2) If there is a natural tendency to learn from bubbles should there be looser leverage requirements in novel asset markets? Maybe we should heavily subsidize novel investment! Indeed who's to say we shouldn't subsidize bubbles and then pop them on our own terms by mandating deleveraging. Investors might start learning we are going to do this, but that might not be such a bad thing. Can we synthesize bubbles to "speed up" the learning process that leads to stability?
3) What counts as a "sufficiently novel market condition" for seasoned veterans to go nuts and
create a bubble? Presumably very minor innovations in assets are less likely to cause bubbles?
4) In an era of "too big to fail," financial institutions might not be sufficiently incentivized to learn to avoid bubbles. Although the example of Merrill Lynch et. al ought to be sobering.
It would be awesome to see follow-up experiments that institute different types of "government regulation," to see the effect on bubble creation.
Posted by: mk at Dec 12, 2008 11:18:38 AM
Remember, frog hunting with rifle, shotgun or firearm may be illegal in your state. Check with your local law professor.
Posted by: guy in the veal calf office at Dec 12, 2008 11:53:22 AM
Could one interpret the bubble research as saying that bubbles are good because people seem to like them. It is like the state lotteries, I like to call them the tax on stupidity but some people love having a possibility to become very rich no matter how bad the odds are and will pay dearly for it.
Posted by: floccina at Dec 12, 2008 12:01:42 PM
tyler, i was wondering if you might have a comment on this article?
http://atimes.com/atimes/Global_Economy/JL12Dj02.html
Posted by: ywreader at Dec 12, 2008 1:26:12 PM
Virginia Postrel is to commended for an excellent summary
of the state of affairs in the experimental lit on bubbles.
Why they are not necessarily a good thing is that the pleasure
they give is of the very immediate variety, like sex or cocaine,
zapping the pleasure centers lower down in the brain rather
than the ratiocinating pre-frontal cortex, where our longer
term thinking is carried out. While those centers do provide
some useful actions (and some speculators make a lot of money),
relying on them excessively can be very self-damaging.
Of course, most of our major waves of investment in new
technologies ends up being accompanied by some speculative
bubbles that feed the animal spirits. So, maybe they are
necessary to some extent as well as hard to avoid. Nevertheless,
I can see putting in place some mechanisms to slow them down,
such as simply forbidding certain kinds of financing, which
tends to get loosened anyways during bubbles, such as the
dicier kinds of housing mortgages, interest-only, and their
crazy relatives that only made sense during a bubble, and the
handing out of which fed the bubble further.
Posted by: Barkley Rosser at Dec 12, 2008 2:42:21 PM
Is Postrel a closet Austrian? That doesn't sound tolerantly cosmopolitan to me!
Posted by: Brandybuck at Dec 12, 2008 2:53:22 PM
I don't know where to ask this question so I'll just post it here and hope for the best.
Several years ago I read a posting on Marginal Revolution that commented on the shrinking wage differential of skilled labor versus unskilled labor over time. For the life of me I can't find that post in the search and I can't find the study it was referring to. If anyone can help, I'd greatly appreciate it.
Thanks
Posted by: Steve Roberts at Dec 12, 2008 5:20:17 PM
Are there good books on the experimental research on bubbles (and other research if it's useful)? Why aren't we talking more about this these days?
Posted by: jsalvati at Dec 12, 2008 8:30:29 PM
jsalvati,
No.
Posted by: Barkley Rosser at Dec 13, 2008 12:40:44 AM
I wonder what happens when you run the asset pricing experiment with shorting allowed? Ya wanna bet that the bubbles aren't so pronounced?
Posted by: Russell Nelson at Dec 16, 2008 12:40:04 AM
RTFP, as they say. Price bubbles may persist even with short selling. Or not. More research necessary.
Posted by: Russell Nelson at Dec 16, 2008 12:43:46 AM
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