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I’ve done a number of posts pointing out that people are hard-wired to find patterns where they don’t exist. Studies have shown that people will see “bubbles”, even in data that is generated to follow a random walk.

Now of course just because most people would believe in bubbles even if they did not exist, does not in any way prove that they don’t exist. Maybe they do. But we always have to be on guard against cognitive bias.

Bob Murphy had some fun earlier today commenting on a post I did on China. His post is entitled Chinese Stock Market Crashing”:

Details here. It’s down about 25% in the last two weeks, and 11% in the last two days. Meanwhile, Scott Sumner is running victory laps, over those broken records who called it a “bubble” but didn’t give the precise timing.

So it sounds like I did a post mocking Chinese stock market bubble theories, and then the market crashed right after my post. That wouldn’t really prove anything, but even I have to admit it would be pretty funny. Chalk one up for Bob.

The only problem is it never happened. My post was put up on June 27th, and when Bob did his post the Chinese market was actually higher than it was when I did my post.

Does this prove anything about the Chinese market? No, for all I know it might collapse 20% tonight. Who knows? It’s certainly been extremely volatile in recent weeks.

What it does show is that people are very receptive to data that supports their preconceived bubble theories. And this is a part of my anti-bubble theory. I’ve done posts on how the Economist magazine once bragged that it correctly predicted a bunch of housing bubbles, whereas the article it cited was actually totally, spectacularly WRONG about the future course of house prices in a number of countries. Prices actually rose in markets where they predicted declines. And yet the Economist put their “successful” prediction into an ad for the magazine. Someday China will have a big crash, and the people who have been predicting it for a long time will say, “I told you so.” And I’ll say, “Market prices rise and fall, that’s what markets do.”

Economies have booms and recessions. If talking about bubbles makes you feel good, go for it. But don’t think it’s telling us anything useful about the world. When prices are high they might crash, or they might go higher. That’s what history shows.

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This entry was posted on June 30th, 2015 and is filed under China, Efficient markets hypothesis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



