From: Andrew Odlyzko <odlyzko@umn.edu> Date: August 5, 2010 12:48:08 PM AST To: Andrew Odlyzko <odlyzko@umn.edu> Subject: paper on technology manias and gullibility
I had a note in my files that you expressed an interest in the project comparing the Internet bubble to the British Railway Mania of the 1840s. So here is the announcement of my fourth work on this topic. Unlike the previous three, this one is primarily about the Internet bubble and future ones.
Any comments you might have would be greatly appreciated.
If I had you on the list by mistake, please accept my apologies. If you will let me know, I will remove your email address right away from the list.
Best regards, Andrew
http://www.dtc.umn.edu/~odlyzko/doc/mania03.pdf
Bubbles, gullibility, and other challenges for economics, psychology, sociology, and information sciences
Andrew Odlyzko
School of Mathematics and Digital Technology Center University of Minnesota
odlyzko@umn.edu http://www.dtc.umn.edu/~odlyzko
Preliminary version, August 5, 2010
ABSTRACT
Gullibility is the principal cause of bubbles. Investors and the general
Begin forwarded message: public get snared by a "beautiful illusion" and throw caution to the wind. Attempts to identify and control bubbles are complicated by the fact that the authorities who might naturally be expected to take action have often (especially in recent years) been among the most gullible, and were cheerleaders for the exuberant behavior. Hence what is needed is an objective measure of gullibility.
This paper argues that it should be possible to develop such a measure.
Examples demonstrate, contrary to the efficient market dogma, that in some manias, even top-level business and technology leaders do fall prey to collective hallucinations and become irrational in objective terms. During the Internet bubble, for example, large classes of them first became unable to comprehend compound interest, and then lost even the ability to do simple arithmetic, to the point of not being able to distinguish 2 from 10. This phenomenon, together with advances in analysis of social networks and related areas, points to possible ways to develop objective and quantitative tools for measuring gullibility and other aspects of human behavior implicated in bubbles. It cannot be expected to infallibly detect all destructive bubbles, and may trigger false alarms, but it ought to alert observers to periods where collective investment behavior is becoming irrational.
The proposed gullibility index might help in developing realistic economic
models. It should also assist in illuminating and guiding decision making.
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The previous three papers in this series are available at:
1. Collective hallucinations and inefficient markets: The British Railway
Mania of the 1840s
http://www.dtc.umn.edu/~odlyzko/doc/hallucinations.pdf
2. This time is different: An example of a giant, wildly speculative, and
successful investment mania, B.E. Journal of Economic Analysis & Policy, vol. 10, issue 1, 2010, article 60 (registration required)
http://www.bepress.com/bejeap/vol10/iss1/art60
preprint available at:
http://www.dtc.umn.edu/~odlyzko/doc/mania01.pdf
3. The collapse of the Railway Mania, the development of capital markets,
and Robert Lucas Nash, a forgotten pioneer of accounting and financial analysis
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Source materials for the Railway Mania and the Internet bubble are
available
at the web pages
http://www.dtc.umn.edu/~odlyzko/rrsources/
and