Bubbles, Gullibility, and Other Challenges for Economics, Psychology, Sociology, and Information Sciences

First Monday, Vol. 15, No. 9, Sept. 2010

48 Pages Posted: 30 Aug 2010 Last revised: 8 Aug 2015

See all articles by Andrew Odlyzko

Andrew Odlyzko

University of Minnesota - Twin Cities - School of Mathematics and Digital Technology Center

Date Written: August 29, 2010

Abstract

Gullibility is the principal cause of bubbles. Investors and the general public get snared by a "beautiful illusion" and throw caution to the wind. Attempts to identify and control bubbles are complicated by the fact that the authorities who might naturally be expected to take action have often (especially in recent years) been among the most gullible, and were cheerleaders for the exuberant behavior. Hence what is needed is an objective measure of gullibility.

This paper argues that it should be possible to develop such a measure. Examples demonstrate, contrary to the efficient market dogma, that in some manias, even top business and technology leaders fall prey to collective hallucinations and become irrational in objective terms. During the Internet bubble, for example large classes of them first became unable to comprehend compound interest, and then lost even the ability to do simple arithmetic, to the point of not being able to distinguish 2 from 10. This phenomenon, together with advances in analysis of social networks and related areas, points to possible ways to develop objective and quantitative tools for measuring gullibility and other aspects of human behavior implicated in bubbles. It cannot be expected to infallibly detect all destructive bubbles, and may trigger false alarms, but it ought to alert observers to periods where collective investment behavior is becoming irrational.

The proposed gullibility index might help in developing realistic economic models. It should also assist in illuminating and guiding decision making.

Keywords: Bubbles, Market Inefficiency, Irrational Investing, Internet Mania

JEL Classification: D72, D84, E27, G14, L96, O31, O33

Suggested Citation

Odlyzko, Andrew, Bubbles, Gullibility, and Other Challenges for Economics, Psychology, Sociology, and Information Sciences (August 29, 2010). First Monday, Vol. 15, No. 9, Sept. 2010. Available at SSRN: https://ssrn.com/abstract=1668130 or http://dx.doi.org/10.2139/ssrn.1668130

Andrew Odlyzko (Contact Author)

University of Minnesota - Twin Cities - School of Mathematics and Digital Technology Center ( email )

127 Vincent Hall
206 Church St. SE
Minneapolis, MN 55455
United States
612-625-6413 (Phone)
612-626-2017 (Fax)

HOME PAGE: http://www.dtc.umn.edu/~odlyzko

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