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Stock market bubbles: Our evolutionary roots explain why investors follow the herd
The same parts of the brain that help us navigate complex social interactions can also drive us to make wildly bad investments.
- Stock market bubbles, or asset bubbles, refer to a situation where stocks are valued far above what they're fundamentally worth.
- Unique factors contribute to each stock market bubble, but all play out in a generally similar series of stages.
- Research on the human social brain network offers insight into why investors participate in asset bubbles.
In retrospect, there were clear signs that the stock market bubble was about to burst in 2000.
The mid 1990s was a time of rapid technological growth and, consequently, wild speculation. Internet companies promised to transform the world. Dotcom stocks soared to incredible highs, with many multiplying in value shortly after initial public offerings, like Priceline, whose shares rose 1,000% just one month after going public.
But there were problems in 2000, ranging from a recession in Japan to the inevitability of the Federal Reserve raising interest rates. There was also the simple fact that most dotcom companies weren't profitable. In fact, many were in debt.
Some investors realized this but bought into the story that huge profits were just around the corner. They weren't. By 2001, most dotcom stocks had dropped at least 75 percent from their 52-week high, wiping about $1.75 trillion off the market.
But the dotcom bubble wasn't the first asset bubble to inflate and burst, and it wasn't the last. Unique factors contribute to each asset bubble, but all feature broad phases that are remarkably similar. And that's largely because of the strong psychological pulls of herd mentality.
The science of 'herd mentality' | Your Brain on Money | Big Think www.youtube.com
What is a stock market bubble?
A stock market bubble — or more broadly, an asset bubble — occurs when the price of an asset inflates far above what it's fundamentally worth. Like soap bubbles, asset bubbles inevitably pop, causing a sharp drop in price. Asset bubbles can occur in any market — including stocks, real estate, and commodities — and they've existed ever since people have been trading in markets.
One of the earliest and most famous examples is the tulip mania that occurred in 17th century Europe during the Dutch Golden Age. Tulip bulbs became so fashionable that prices rapidly soared, with some rare bulbs reaching prices that far exceeded the average annual income of Dutch workers. Then the market suddenly crashed in 1637.
Popping a bubble
To get a conceptual grasp on how bubbles form, imagine a high school party that gets out of hand. The party starts with a few people, maybe hanging out at a kid's house whose parents are out of town. A handful of other kids hear about the party and show up. Then word spreads among the whole class.
Afraid of missing out, carfulls of kids start showing up. Soon the house is packed with people. By midnight, a few wiser kids leave because it's getting out of hand. The party keeps raging. But inevitably, the cops arrive and bust the party. Some of the kids who stayed too late suffer the consequences.
In retrospect, it was clear that the party was going to get busted. So why did people stay? One reason is that, like stock market bubbles, it's impossible to predict exactly when the cops are going to show up — or, in other words, when collective emotions are going to shift from euphoria to panic.
In his 1986 book Stabilizing an Unstable Economy, the American economist Hyman Minsky gave a more technical description of how asset bubbles play out:
- Displacement: This phase occurs when some external force, such as a new technology, captures investors' attention. The dawn of internet companies is a good example: A handful of investors think the internet will be a game-changing technology, so they decide to invest early. Prices start rising.
- Boom: As more investors enter the market, prices rise at a quicker pace. The media starts covering the boom, which attracts even more investors, who fear that they will miss out on a great opportunity.
- Euphoria: Prices skyrocket to wild highs as investors throw caution to the wind. Although there are some pessimists (known as bears) criticizing the market, the optimistic investors (bulls) and analysts try to justify the inflated prices by touting questionable metrics and arguments. Some bulls say prices will never crash because the asset or asset class represents a "new paradigm" or because there will always be buyers waiting to gobble up any price drops, an idea called the "greater fool theory."
- Profit-taking: To lock in profit, a handful of "smart money" investors sell some or all of their asset holdings while prices are still high.
- Panic: Due to some kind of event, prices suddenly begin to crash. Euphoric buying turns to panic selling, which causes many former optimists to sell their holdings at any price, even at a loss. With essentially no new buyers showing up, prices drop even further because supply far exceeds demand.
Remember this old stock market bubble chart with all the stages explained? Well, I pasted the Bitcoin price chart o… https://t.co/mnBAvZnvF8— Peter Hamza (@Peter Hamza)1517510900.0
You can see these boom-and-bust cycles play out in markets throughout history, from tulips to Bitcoin. But what causes investors to keep inflating and popping stock market bubbles over and over again?
Conformity and the social brain network
Like other primates, humans are highly social creatures who model their behavior on what others are thinking, feeling, and doing. Over millions of years, the human brain has evolved to perceive social cues and use that information to strategically regulate our behavior. Social information is processed in multiple regions of the brain, which together make up the social brain network.
This network often helps us navigate social dilemmas. For example, if you're visiting a foreign country for the first time, and you're unsure of how to behave at, say, a religious site, you might copy the locals' behavior so you don't offend anybody and your visit goes smoothly.
But our tendency to copy others isn't always adaptive; sometimes the herd is wrong. What's strange, however, is that people tend to have a hard time recognizing when the herd is wrong, even when it's obviously wrong. No other psychological test illustrates this more clearly than the Asch conformity experiments.
In the 1950s, the psychologist Solomon Asch conducted a series of experiments designed to test how often individuals went along with a majority opinion that was clearly wrong. The original experiment went like this: Eight participants were asked to complete a perceptual task in which they had to look at a "reference" line on a card. Another card had three lines on it, one of which was clearly the same length as the reference line.
The participants were asked to say which of the three lines matched the reference line. In reality, all but one of the participants were actors. The actors were instructed to sometimes uniformly give the right answer but other times uniformly give the wrong answer. Over a series of rounds, the results showed that the non-actor individuals tended to agree with the obviously incorrect majority opinion, at least some of the time.
Interestingly, the psychological pull of conformity can even affect people who are familiar with the design of the Asch experiment, as Freethink's video shows.
"That intelligent, well-meaning, young people are willing to call white black is a matter of concern," Asch wrote.
One of the pairs of cards used in the experiment. The card on the left has the reference line, and the one on the right shows the three comparison lines.Fred the Oyster via Wikipedia
The members of Reddit's WallStreetBets community often call themselves "apes," a joke that refers to how they often "ape into" investments without giving it much thought or just because others are also doing it. It's a pretty accurate term when you consider how non-human primates make decisions.
To gain insights into the evolutionary roots of our own decision-making behaviors, researchers have trained primates like capuchin monkeys to trade coins for food and then studied how they spend the coins under various conditions. The results suggest that some primates seem to share several biases with humans, including:
- The endowment effect. Some primates seem to overvalue assets that are in their possession over ones that are not.
- Choice-induced preference changes. Some primates will shift their preferences to match their own previous decisions. For example, if primates rate two treats as equally desirable, but then are forced to choose between the two, they'll later devalue the treat they didn't choose.
- Loss aversion. Some primates avoid gambles that are framed as "losses" when compared to an arbitrary reference point. In other words, when given two trading options that pay the exact same amount, primates tend to prefer the option that frames their payout as increasing from an arbitrary starting point, rather than decreasing to the same payout.
But monkeys also exhibit another human bias when making economic decisions: conformity. Michael Platt, a neuroscientist and marketing professor at the Wharton School of the University of Pennsylvania, told Freethink:
"What we've found is that monkeys in a market where there's another monkey will tend to follow what that other monkey does. So monkeys tend to follow the herd. They copy each other, and they tend to buy, buy, buy. And they get into a bubble, and they lose everything."
Platt said the monkeys' behavior is funny, sure, but also profound because similar studies on humans yield the exact same results.
"That's really interesting to us, because it tells us that this behavior that we see in people — and that has enormous repercussions — it's there from a heritage that we share with monkeys going back 25 million years," Platt said.
Breaking from the herd
Our deep-rooted tendency to follow the herd is more of an evolutionary feature than a bug. We often benefit from following group signals, similar to a gazelle that takes off sprinting not because it sees a cheetah, but because it sees other gazelles sprinting.
Still, stock market bubbles reveal the dangers of blindly following the herd. So, how can people resist buying the top of stock market bubbles?
The answer might be to slow down. Although our social brain network enables us to quickly glean useful information from the herd, that speediness comes at the price of accuracy. Put another way: If you're consistently "aping in" on hype-driven stocks, you might make some quick gains, but you also might get caught holding the bag when the next stock market bubble bursts.
"In thinking about herding in bubble markets, I think it's reasonable to suppose that if we could slow people down, that would allow more evidence to accumulate, and more likely to make a better decision," Platt said.
Inventions with revolutionary potential made by a mysterious aerospace engineer for the U.S. Navy come to light.
- U.S. Navy holds patents for enigmatic inventions by aerospace engineer Dr. Salvatore Pais.
- Pais came up with technology that can "engineer" reality, devising an ultrafast craft, a fusion reactor, and more.
- While mostly theoretical at this point, the inventions could transform energy, space, and military sectors.
The U.S. Navy controls patents for some futuristic and outlandish technologies, some of which, dubbed "the UFO patents," came to light recently. Of particular note are inventions by the somewhat mysterious Dr. Salvatore Cezar Pais, whose tech claims to be able to "engineer reality." His slate of highly-ambitious, borderline sci-fi designs meant for use by the U.S. government range from gravitational wave generators and compact fusion reactors to next-gen hybrid aerospace-underwater crafts with revolutionary propulsion systems, and beyond.
Of course, the existence of patents does not mean these technologies have actually been created, but there is evidence that some demonstrations of operability have been successfully carried out. As investigated and reported by The War Zone, a possible reason why some of the patents may have been taken on by the Navy is that the Chinese military may also be developing similar advanced gadgets.
Among Dr. Pais's patents are designs, approved in 2018, for an aerospace-underwater craft of incredible speed and maneuverability. This cone-shaped vehicle can potentially fly just as well anywhere it may be, whether air, water or space, without leaving any heat signatures. It can achieve this by creating a quantum vacuum around itself with a very dense polarized energy field. This vacuum would allow it to repel any molecule the craft comes in contact with, no matter the medium. Manipulating "quantum field fluctuations in the local vacuum energy state," would help reduce the craft's inertia. The polarized vacuum would dramatically decrease any elemental resistance and lead to "extreme speeds," claims the paper.
Not only that, if the vacuum-creating technology can be engineered, we'd also be able to "engineer the fabric of our reality at the most fundamental level," states the patent. This would lead to major advancements in aerospace propulsion and generating power. Not to mention other reality-changing outcomes that come to mind.
Among Pais's other patents are inventions that stem from similar thinking, outlining pieces of technology necessary to make his creations come to fruition. His paper presented in 2019, titled "Room Temperature Superconducting System for Use on a Hybrid Aerospace Undersea Craft," proposes a system that can achieve superconductivity at room temperatures. This would become "a highly disruptive technology, capable of a total paradigm change in Science and Technology," conveys Pais.
High frequency gravitational wave generator.
Credit: Dr. Salvatore Pais
Another invention devised by Pais is an electromagnetic field generator that could generate "an impenetrable defensive shield to sea and land as well as space-based military and civilian assets." This shield could protect from threats like anti-ship ballistic missiles, cruise missiles that evade radar, coronal mass ejections, military satellites, and even asteroids.
Dr. Pais's ideas center around the phenomenon he dubbed "The Pais Effect". He referred to it in his writings as the "controlled motion of electrically charged matter (from solid to plasma) via accelerated spin and/or accelerated vibration under rapid (yet smooth) acceleration-deceleration-acceleration transients." In less jargon-heavy terms, Pais claims to have figured out how to spin electromagnetic fields in order to contain a fusion reaction – an accomplishment that would lead to a tremendous change in power consumption and an abundance of energy.
According to his bio in a recently published paper on a new Plasma Compression Fusion Device, which could transform energy production, Dr. Pais is a mechanical and aerospace engineer working at the Naval Air Warfare Center Aircraft Division (NAWCAD), which is headquartered in Patuxent River, Maryland. Holding a Ph.D. from Case Western Reserve University in Cleveland, Ohio, Pais was a NASA Research Fellow and worked with Northrop Grumman Aerospace Systems. His current Department of Defense work involves his "advanced knowledge of theory, analysis, and modern experimental and computational methods in aerodynamics, along with an understanding of air-vehicle and missile design, especially in the domain of hypersonic power plant and vehicle design." He also has expert knowledge of electrooptics, emerging quantum technologies (laser power generation in particular), high-energy electromagnetic field generation, and the "breakthrough field of room temperature superconductivity, as related to advanced field propulsion."
Suffice it to say, with such a list of research credentials that would make Nikola Tesla proud, Dr. Pais seems well-positioned to carry out groundbreaking work.
A craft using an inertial mass reduction device.
Credit: Salvatore Pais
The patents won't necessarily lead to these technologies ever seeing the light of day. The research has its share of detractors and nonbelievers among other scientists, who think the amount of energy required for the fields described by Pais and his ideas on electromagnetic propulsions are well beyond the scope of current tech and are nearly impossible. Yet investigators at The War Zone found comments from Navy officials that indicate the inventions are being looked at seriously enough, and some tests are taking place.
If you'd like to read through Pais's patents yourself, check them out here.
Laser Augmented Turbojet Propulsion System
Credit: Dr. Salvatore Pais
People tend to reflexively assume that fun events – like vacations – will go by really quickly.
For many people, summer vacation can't come soon enough – especially for the half of Americans who canceled their summer plans last year due to the pandemic.
But when a vacation approaches, do you ever get the feeling that it's almost over before it starts?
If so, you're not alone.
In some recent studies Gabriela Tonietto, Sam Maglio, Eric VanEpps and I conducted, we found that about half of the people we surveyed indicated that their upcoming weekend trip felt like it would end as soon as it started.
This feeling can have a ripple effect. It can change the way trips are planned – you might, for example, be less likely to schedule extra activities. At the same time, you might be more likely to splurge on an expensive dinner because you want to make the best of the little time you think you have.
Where does this tendency come from? And can it be avoided?
Not all events are created equal
When people look forward to something, they usually want it to happen as soon as possible and last as long as possible.
We first explored the effect of this attitude in the context of Thanksgiving.
We chose Thanksgiving because almost everyone in the U.S. celebrates it, but not everyone looks forward to it. Some people love the annual family get-together. Others – whether it's the stress of cooking, the tedium of cleaning or the anxiety of dealing with family drama – dread it.
So on the Monday before Thanksgiving in 2019, we surveyed 510 people online and asked them to tell us whether they were looking forward to the holiday. Then we asked them how far away it seemed, and how long they felt it would last. We had them move a 100-point slider – 0 meaning very short and 100 meaning very long – to a location that reflected their feelings.
As we suspected, the more participants looked forward to their Thanksgiving festivities, the farther away it seemed and shorter it felt. Ironically, longing for something seems to shrink its duration in the mind's eye.
Winding the mind's clock
Most people believe the idiom “time flies when you're having fun," and research has, indeed, shown that when time seems to pass by quickly, people assume the task must have been engaging and enjoyable.
We reasoned that people might be over-applying their assumption about the relationship between time and fun when judging the duration of events yet to happen.
As a result, people tend to reflexively assume that fun events – like vacations – will go by really quickly. Meanwhile, pining for something can make the time leading up to the event seem to drag. The combination of its beginning pushed farther away in their minds – with its end pulled closer – resulted in our participants' anticipating that something they looked forward would feel as if it had almost no duration at all.
In another study, we asked participants to imagine going on a weekend trip that they either expected to be fun or terrible. We then asked them how far away the start and end of this trip felt like using a similar 0 to 100 scale. 46% of participants evaluated the positive weekend as feeling like it had no duration at all: They marked the beginning and the end of the vacation virtually at the same location when using the slider scale.
Thinking in hours and days
Our goal was to show how these two judgments of an event – the fact that it simultaneously seems farther away and is assumed to last for less time – can nearly eliminate the event's duration in the mind's eye.
We reasoned that if we didn't explicitly highlight these two separate pieces – and instead directly asked them about the duration of the event – a smaller portion of people would indicate virtually no duration for something they looked forward to.
We tested this theory in another study, in which we told participants that they would watch two five-minute-long videos back-to-back. We described the second video as either humorous or boring, and then asked them how long they thought each video would feel like it lasted.
We found that the participants predicted that the funny video would still feel shorter and was farther away than the boring one. But we also found that participants believed it would last a bit longer than the responses we received in the earlier studies.
This finding gives us a way to overcome this biased perception: focus on the actual duration. Because in this study, participants directly reported how long the funny video would last – and not the perceived distance of its beginning and its end – they were far less likely to assume it would be over just as it started.
While it sounds trivial and obvious, we often rely on our subjective feelings – not objective measures of time – when deciding how long a period of time will feel and how to best use it.
So when looking forward to much-anticipated events like vacations, it's important to remind yourself just how many days it will last.
You'll get more out of the experience – and, hopefully, put yourself in a better position to take advantage of the time you do have.
A global survey shows the majority of countries favor Android over iPhone.
- When Android was launched soon after Apple's own iPhone, Steve Jobs threatened to "destroy" it.
- Ever since, and across the world, the rivalry between both systems has animated users.
- Now the results are in: worldwide, consumers clearly prefer one side — and it's not Steve Jobs'.
A woman on her phone in Havana, Cuba. Mobile phones have become ubiquitous the world over — and so has the divide between Android and iPhone users.Credit: Yamil Lage / AFP via Getty Images.
Us versus them: it's the archetypal binary. It makes the world understandable by dividing it into two competing halves: labor against capital, West against East, men against women.
These maps are the first to show the dividing lines between one of the world's more recent binaries: Android vs. Apple. Published by Electronics Hub, they are based on a qualitative analysis of almost 350,000 tweets worldwide that presented positive, neutral, and negative attitudes toward Android and/or Apple.
Steve Jobs wanted to go "thermonuclear"
Feelings between Android and Apple were pretty tribal from the get-go. It was Steve Jobs himself who said, when Google rolled out Android a mere ten months after Apple launched the iPhone, "I'm going to destroy Android, because it's a stolen product. I'm willing to go thermonuclear war on this."
Buying a phone is like picking a side in the eternal feud between the Hatfields and the McCoys. Each choice for automatically comes with an in-built arsenal of arguments against.
If you are an iPhone person, you appreciate the sleekness and simplicity of its design, and you are horrified by the confusing mess that is the Android operating system. If you are an Android aficionado, you pity the iPhone user, a captive of an overly expensive closed ecosystem, designed to extract money from its users.
Even without resorting to those extremes, many of us will recognize which side of the dividing line that we are on. Like the American Civil War, that line runs through families and groups of friends, but that would be a bit confusing to chart geographically. To un-muddle the information, these maps zoom out to state and country level.
If the contest is based on the number of countries, Android wins. In all, 74 of the 142 countries surveyed prefer Android (in green on the map). Only 65 favor Apple (colored grey). That's a 52/48 split, which may not sound like a decisive vote, but it was good enough for Boris Johnson to get Brexit done (after he got breakfast done, of course).
And yes, math-heads: 74 plus 65 is three short of 142. Belarus, Fiji, and Peru (in yellow on the map) could not decide which side to support in the Global Phone War.
What about the United States, home of both the Android and the iPhone? Another victory for the former, albeit a slightly narrower one: 30.16 percent of the tweets about Android were positive versus just 29.03 percent of the ones about Apple.
United States: Texas surrounded!
Credit: Electronics Hub
There can be only one winner per state, though, and that leads to this preponderance of Android logos. Frankly, it's a relief to see a map showing a visceral divide within the United States that is not the coasts versus the heartland.
- Apple dominates in 19 states: a solid Midwestern bloc, another of states surrounding Texas, the Dakotas and California, plus North Carolina, New Hampshire, and Rhode Island.
- And that's it. The other 32 are the United States of Android. You can drive from Seattle to Miami without straying into iPhone territory. But no stopovers in Dallas or Houston – both are behind enemy lines!
North America: strongly leaning toward Android
Credit: Electronics Hub
Only eight of North America's 21 countries surveyed fall into the Apple category.
- The U.S. and Canada lean Android, while Mexico goes for the iPhone.
- Central America is divided, but here too Android wins hands down, 5-2.
Europe: Big Five divided
Credit: Electronics Hub
In Europe, Apple wins, with 20 countries preferring the iPhone, 17 going for Android, and Belarus sitting on the fence.
- Of Western Europe's Big Five markets, three (UK, Germany, Spain) are pro-Android, and two (France, Italy) are pro-Apple.
- Czechia and Slovakia are an Apple island in the Android sea that is Central Europe. Glad to see there is still something the divorcees can agree on.
South America: almost even
Credit: Electronics Hub
In South America, the divide is almost even.
- Five countries prefer Android, four Apple, and one is undecided.
- In Peru, both Android- and Apple-related tweets were 25 percent positive.
Africa: watch out for Huawei
Credit: Electronics Hub
In Africa, Android wins by 17 countries versus Apple's 15.
- There's a solid Android bloc running from South Africa via DR Congo all the way to Ethiopia.
- iPhone countries are scattered throughout the north (Algeria), west (Guinea), east (Somalia), and south (Namibia).
Huawei — increasingly popular across the continent — could soon dramatically change the picture in Africa. Currently still running on Android, the Chinese phone manufacturer has just launched its own operating system, called Harmony.
Middle East: Iran vs. Saudi Arabia (again)
Credit: Electronics Hub
In the Middle East and Central Asia, Android wins 8 countries to Apple's 6.
- But it's complicated. One Turkish tweeter wondered how it is that iPhones seem more popular in the Asian half of Istanbul, while Android phones prevailed in the European part of the city.
- The phone divide matches up with the region's main geopolitical one: Iran prefers Android, Saudi Arabia the iPhone.
Asia-Pacific: Apple on the periphery
Credit: Electronics Hub
Another wafer-thin majority for Android in the Asia-Pacific region: 13 countries versus 12 for Apple — and one abstention (Fiji).
- The two giants of the Asian mainland, India and China, are both Android countries. Apple countries are on the periphery.
- And if India is Android, its rival Pakistan must be Apple. Same with North and South Korea.
Experts point to the fact that both operating systems are becoming more alike with every new generation as a potential resolution to the conflict. But as any student of human behavior will confirm: smaller differences will only exacerbate the rivalry between both camps.
Maps taken from Electronics Hub, reproduced with kind permission.
Strange Maps #1096
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