How to not drive over cliffs

Henry Blodget was a Merrill Lynch tech analyst during the tech bubble. A bubble he rode to fame and then to a Spitzer investigation and oblivion. In this piece in the Atlantic he gives a great analysis of what he thinks caused the current housing and debt bubble and draws the conclusion that the problem is systemic and largely unavoidable in the long run in free-market capitalism.

His analysis is insightful for its first hand account of the problem of momentum vs fundamentals. That despite bad and deteriorating fundamentals it is still in the personal interests of a fund manager or property speculator to stay onboard a bubble with sufficient momentum. This problem itself is really an extension of the problem of the limits of inductive reasoning. At any point along a mountain road that you know ends in a cliff your best guess as to what will happen next always has to be we will continue driving onwards and upwards, you will be right almost all the time and only wrong once.

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2 Responses to How to not drive over cliffs

  1. davebath says:

    Why should we be surprised when bull markets are too full of bull?

    From The Economist

    (2008-03-22) “Yet, like Wile E. Coyote running over the edge of a cliff, financial services kept on going.”

    (2007-04-21) “But it is in the nature of capitalism to test new ideas to destruction and to use new instruments as the basis of speculative excess.”

  2. Pingback: Very interesting article on the bubble and its bursting « Sachi’s hyperbolic space

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