Usually, there are 5 elements of a financial crisis. With no exceptions, these truths existed in each financial disaster from the South Sea Bubble to the most recent real estate meltdown.
The 1st generality is predicitability. Savvy investors are a lot certain to discover an inefficient market than the government. This answers why a financial bubble can get out of control with nobody making an attempt to end it. If the price of an asset is going up, most speculators are ecstatic even if a trend is not supportable. Politicians also love this trend as they take credit for false success.
The second main element is perceptual bias. We have a tendency to disregard extremely rare events. These are events that are highly unlikely but have a massive impact. Houses built in a flood zone which averages a flood each fifty years has about a two percent likelihood that it will flood that year. Our natural bias is to disregard this issue. When the unavoidable flood does arrive, we are then shocked over the destruction to our house.
The exact opposite is also correct. If 2 big floods happen within a brief period, individuals that live within the flood zone will likely move someplace else even though the chances have not statistically changed. After experiencing two floods, there maybe a hundred year time period where there isn't a flood. The perceptual bias will eventually fall back to what it was originally.
How are you able to use this? By buying right after a disaster in which the prevailing bias is negative. Buying a place after a flood, quake, tornado, or other natural catastrophe is generally a major bargain. Earthquakes, as an example, occur infrequently but when they do happen, they're going to remain fresh in people's mind for a long while.
Shifting the chance to some other person ends in excessively dangerous behavior. This often includes having subsidies against a natural disaster, hence the building of fancy vacation homes right on the shore of the sea. This removes the risk for the property owner because the government will pay for a replacement. Another example of this a loan corporation originating a subprime mortgage and selling it as a security to someone else. Financial bubbles nearly always exist, in part, from lax lending standards.
Negative cognition happens once the catastrophe has occurred. Greediness turns into fear and asset prices fall. The 'bust' cycle is typically equal and opposite to the boom that predated it. On a positive note, the shakeout from the bubble results in big possibilities for smart investors.
In a natural catastrophe, it is clear who the victims were. In a financial boom and bust cycle, understanding the victims is more complex. Figuring out how to help people and how to stop the following catastrophe has proven difficult. In the current financial crisis, congressmen and large financial institutions both have their own interests at stake. Getting leaders to make ethical and hard decisions isn't easy because they like to put off issues for somebody else to deal with. Most politicians do not look past the subsequent election explaining why very little long-term planning is ever accomplished.
The 1st generality is predicitability. Savvy investors are a lot certain to discover an inefficient market than the government. This answers why a financial bubble can get out of control with nobody making an attempt to end it. If the price of an asset is going up, most speculators are ecstatic even if a trend is not supportable. Politicians also love this trend as they take credit for false success.
The second main element is perceptual bias. We have a tendency to disregard extremely rare events. These are events that are highly unlikely but have a massive impact. Houses built in a flood zone which averages a flood each fifty years has about a two percent likelihood that it will flood that year. Our natural bias is to disregard this issue. When the unavoidable flood does arrive, we are then shocked over the destruction to our house.
The exact opposite is also correct. If 2 big floods happen within a brief period, individuals that live within the flood zone will likely move someplace else even though the chances have not statistically changed. After experiencing two floods, there maybe a hundred year time period where there isn't a flood. The perceptual bias will eventually fall back to what it was originally.
How are you able to use this? By buying right after a disaster in which the prevailing bias is negative. Buying a place after a flood, quake, tornado, or other natural catastrophe is generally a major bargain. Earthquakes, as an example, occur infrequently but when they do happen, they're going to remain fresh in people's mind for a long while.
Shifting the chance to some other person ends in excessively dangerous behavior. This often includes having subsidies against a natural disaster, hence the building of fancy vacation homes right on the shore of the sea. This removes the risk for the property owner because the government will pay for a replacement. Another example of this a loan corporation originating a subprime mortgage and selling it as a security to someone else. Financial bubbles nearly always exist, in part, from lax lending standards.
Negative cognition happens once the catastrophe has occurred. Greediness turns into fear and asset prices fall. The 'bust' cycle is typically equal and opposite to the boom that predated it. On a positive note, the shakeout from the bubble results in big possibilities for smart investors.
In a natural catastrophe, it is clear who the victims were. In a financial boom and bust cycle, understanding the victims is more complex. Figuring out how to help people and how to stop the following catastrophe has proven difficult. In the current financial crisis, congressmen and large financial institutions both have their own interests at stake. Getting leaders to make ethical and hard decisions isn't easy because they like to put off issues for somebody else to deal with. Most politicians do not look past the subsequent election explaining why very little long-term planning is ever accomplished.
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