Crashcow posed an interesting question the other day:
“Most regular posters of this blog understand the dynamics of housing bubbles well. What is also an interesting puzzle is why some people naturally understand these concepts while others don’t?
One reason might be Education – especially in an analytical field. But there are people with no post-secondary training that get it while many analysts, economists, accountants and engineers clearly don’t. It seems that some of these “professionals” are hopeless – no matter how much evidence and explanation you provide them, they just don’t comprehend.
Another reason that comes to mind is: Experience. If you have stuck a hair pin in an electrical socket once, chances are you won’t be doing that bright idea again. But experience still doesn’t explain it. After prices plunged 20% in 2008, everyone was given a hard lesson that housing doesn’t always go up. But many erased that valuable lesson in less than a year and back for the socket they went.
This is a deep question, but what are the psychological factors that lead to blind optimism?”
In hindsight you can see some pretty foolish choices made in the US bubble markets, or in the Vancouver market by people who should know better. What is the difference between someone who decides the play the odds on a bubble or those that choose to sit it out? Does the string of wins that comes from a bubble inflating make some people more willing to stretch their luck with the idea that it’s different this time?
