The Wrong Stock Market Bubble Predictions

Perhaps the most persistent feature of the financial world during my career is a large number of people stating that different assets are in bubbles or dangerously overvalued territory. It doesn’t matter how many times people are wrong about sighting bubbles. Investors and the media seem to flock to these negative forecasts. It’s been called the persistence of the pessimists. This article gives some recent examples and tries to explain why bubble sighting seem to always be around.

In other words, the payoff for being right when predicting a rare event might far outweigh the penalty for being wrong. That could lead to a proliferation of opportunistic doomsayers.

But I bet that while there are certainly a few such hucksters around, most bubble predictors are motivated by something very different — the natural human tendency to find patterns in things that may or may not be random.

There’s plenty of evidence that our life experiences shape our predictions of the future. Economists Ulrike Malmendier and Stefan Nagel have found that people who experienced lower stock market returns early in their lives tend to take less risk. Other economic events, like inflation, also tend to shape future behavior.