As bubbles don't have a unanimously accepted explanation within the world of finance, economist opinion varies quite a bit. Schools of thought range from denial of their very existence to debates about whether or not bubbles are rational. Furthermore, others look to the social sciences to explain pricing bubbles in terms of human psychology and behaviour; and it is this particular area that I find most intriguing.
As a person with something of a casual interest in areas such as epidemiology and evolutionary psychology, I'm interested to see how some of the ideas discussed in books on my bookshelf at home might apply to this particular area of finance. Over the next few weeks I'll take a look at well discussed aspects like greater fool theory and herding, as well as ideas that maybe aren’t quite so well renowned within economics; risk perception, social proofs and the role of context.
Each of these will shed a little light on issues like why bubbles start, when/why they burst, when they are likely to occur in the first place and why we are destined to see the same newspaper headlines reporting the occurrence of this destructive phenomenon in the future.
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