Five Sane Reasons for Insane Markets
THE EMPEROR'S NEW CLOTHES
Investors follow the herd, confident that other investors must see something they don't. But if stocks dip and no one immediately steps up to buy, the confidence turns to panic.
MULTIPLE EQUILIBRIUMS
Small jolts can knock the economy from an equilibrium of high profitability to one of low profitability. Fear of the jolts causes market gyrations.
ANCHORING
In the absence of better information, people assume that current stock prices must be about right. As the market creeps up, each new high is ''anchored'' by its closeness to the last record--a recipe for bubbles.
OVERCONFIDENCE
Investors extrapolate that current trends will continue, ignoring history. So stock prices overreact to a bit of good news or to their own recent runup.
GAMBLING
Like a Las Vegas habitue on a hot streak, some investors keep doubling their bets in a rising market--attracted by the thrill of winning and perhaps even the whiff of danger that the whole thing could collapse.
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