Readings: Information cascades, Buffett in Wonderland, Stock market turnover
- NY Times: How a Bubble Stayed Under the Radar
. . . “information cascades” that can lead people into serious error. They found that these cascades can affect even perfectly rational people and cause bubblelike phenomena. Why? Ultimately, people sometimes need to rely on the judgment of others, and therein lies the problem.
. . . even if houses are of low investment value, we may now have two people who make purchasing decisions that reveal their conclusion that houses are a good investment. As others make purchases at rising prices, more and more people will conclude that these buyers’ information about the market outweighs their own.
Sounds equally applicable to the Indian real estate market as well!
He compared money managers who promise double-digit returns to the queen in “Alice in Wonderland,” who proclaimed, “Why, sometimes I’ve believed as many as six impossible things before breakfast.” Mr. Buffett added, “Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.”
Once again, reminds me of most mutual funds & PMS’ in India.
. . . turnover of the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) surged by 286 per cent to Rs 1,66,69,410 crore in 2007 as compared to Rs 43,09,692 crore in 2004.
In the derivatives market, the turnover of these two exchanges added up to Rs 1,21,60,701 crore during 2007, . . . it was Rs 26,05,911 crore in 2004.
. . . the assets managed by mutual funds grew by 1.7 times from Rs 3.23 lakh crore in 2006 to Rs 5.5 lakh crore in 2007.
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March 3rd, 2008 at 1:52 pm
I fully agree about your views on the Indian real estate sector. The bubble is going to burst soon in the near term.
March 7th, 2008 at 6:15 am
Just as cascade effects can create bubble in any market, the same principle applies to the bust effect. Especially in today’s global economy and with instant information access, people move in heard in and out of markets.