September 19, 2012
In 1957, historian Arnold J. Toynbee supposedly said, “History is just one damned thing after another.” But that was during a bull market. In a bear market, he’d more likely have said, “History is just one damned financial meltdown after another.” That’s because the popularity of financial theories are tied to waves of social mood. Positive mood trends elevate the stock market and inspire beliefs that investors are rational. Negative mood trends depress markets and promote theories of behavioral bias, herding, cycles, waves, etc. For example, you may have heard that the Efficient Market Hypothesis (which was popular from the early 1960s to late 1990s) is not only dead, but is “really most sincerely dead.”
Behavioral cycles are far more popular now. For example, check out today’s Reuters review of two history books that explore “the uncanny resemblance” between the U.S. financial meltdowns in 1792, 1819, 1837, 1857, 1873, 1893 and 1929, and “today’s chronic banking and debt problems” in Europe. In all of these, “complex financial engineering was a frequent feature when boom turned to bust… . the complex chain of institutions linking borrowers and lenders made it impossible for lenders to distinguish good loans from bad.” Reuters quoted an MIT professor, “It is difficult for people to believe … that crises and failures will always be a feature of political economic systems.” But believing is getting easier.
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