On March 7th, 2005, the fifth anniversary of the Nasdaq peak, the Wall Street Journal ran an article on the topic of financial bubbles. The story revealed the results of a fascinating study:
“In market experiments conducted by George Mason University professor Vernon Smith, who shared in the 2002 Nobel Prize for economics, participants trade a dividend paying ‘stock’ with a very clear fundamental value. A bubble invariably forms, and then bursts. If the experiment is repeated with the same people, a bubble forms again. The second time, though, participants think they will be able to sell their positions before trouble strikes. Participants express surprise that they weren’t able to get out before the second collapse.”
I recalled the excerpt while reading the cover story of the latest Fortune magazine, “Real Estate Frenzy,” the most enlightening article on the real estate bubble I have yet to read. In researching the piece, Fortune, “toured model homes and half-built developments, attended seminars, and stood in condo lines with dozens of real estate speculators (who would probably prefer to be called real estate investors) in Los Angeles, Las Vegas, Phoenix, Austin, and Miami,” and discovered that, “as a group, they tend to alight on a hot market, gorge themselves on property until prices skyrocket, then move on to yet another promising town. Many of them acknowledge that they are part of a bubble and that a correction is coming. But they believe it won’t hit their market—or that if it does, they’ll be able to get out in time.”
Some say economics is more of an art than a science. As such, the most salient point made by the Fortune article is that life does, indeed, imitate art.