Essays in Honour of Horst Hanusch
Edited by Andreas Pyka, Uwe Cantner, Alfred Greiner and Thomas Kuhn
Chapter 6: Bubbles, Crashes and the Psycho-Economic Forces Behind Them
6. Bubbles, crashes and the psychoeconomic forces behind them Friedrich Kugler When ‘normal’ sentiment gives way to collective ‘group think’, we have to look at nonlinear forces to understand market fluctuations’ (Vaga, 1990, p. 36) 1. INTRODUCTION Bubbles and crashes in speculative markets are considered as economic facts whose existence is accepted by empirical as well as by theoretical studies. Well-known historical examples are the Dutch Tulipmania, England’s South Sea bubble and the US Stock Market crash of 1929. Recently, the crashes of 1987 and 1989 and the real-estate bubble in Japan towards the end of the 1980s have turned out to be more prominent. The end of the vision of a ‘New Economy’ is often quoted as an additional contemporary example. The Nasdaq Index which, until mid-March 2000, had climbed to unprecedented heights in less than two years, lost 35 per cent of its value in one month. This so-called dot-com crash had effects on every stock exchange in the world. The bursting of speculative bubbles had consequences not only for the financial markets, but also for the real economy. Binswanger (1999) even goes so far as to regard bubbles as an integral part of modern economic development, and Eichengreen (2002, p. 4) states that such economic crises must be viewed as ´an unavoidable concomitant of the operation of financial markets’. Literature presents complex explanations for market inefficiencies, market anomalies and financial instabilities. Based on the efficient market theory, which assumes solely rational market participants, these are attributed to...
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