1/ Tulip Mania. Dot-com. Real estate. Bitcoin.
Why do bubbles happen and why do they burst?
Get a cup of coffee.
The root cause of bubbles can be traced back to a basic aspect of human nature:
Why do bubbles happen and why do they burst?
Get a cup of coffee.
The root cause of bubbles can be traced back to a basic aspect of human nature:
2/ Imitation.
People imitate other people and learn -
Even something as fundamental as "what should I desire?"
The French Polymath RenΓ© Girard studied this phenomenon of *mimesis*.
Mimesis is not a problem if the outcome is positive.
But sometimes things go real bad.
People imitate other people and learn -
Even something as fundamental as "what should I desire?"
The French Polymath RenΓ© Girard studied this phenomenon of *mimesis*.
Mimesis is not a problem if the outcome is positive.
But sometimes things go real bad.
3/ Consider an investor who imitates Warren Buffett.
He follows his trades, reads his letters, and watches YouTube videos.
He does not have Buffett's research, backup plans or temperament.
But he can copy only WHAT HE SEES. This is important.
Then the market crashes.
He follows his trades, reads his letters, and watches YouTube videos.
He does not have Buffett's research, backup plans or temperament.
But he can copy only WHAT HE SEES. This is important.
Then the market crashes.
4/ When he wipes out, the investor doesn't blame Buffett. That would be blaming himself!
Instead, he looks for a *scapegoat*.
He blames his failure on the short-term traders, HFT, govt, etc. never on himself.
A bubble is this channeling of hate, but on a much larger scale.
Instead, he looks for a *scapegoat*.
He blames his failure on the short-term traders, HFT, govt, etc. never on himself.
A bubble is this channeling of hate, but on a much larger scale.
5/ A bubble starts with an idea - but no ordinary idea.
The idea has to change something fundamental about the world.
It cannot co-exist with how the world is now.
e.g
Railroads - Connectivity like never before
The internet - Revolutionized business
The hype starts to grow.
The idea has to change something fundamental about the world.
It cannot co-exist with how the world is now.
e.g
Railroads - Connectivity like never before
The internet - Revolutionized business
The hype starts to grow.
6/ Two people hear the hype.
One buys it, imitating the believers.
One avoids it, imitating cynics.
These are not mindless folks!
They have their own "reasons" for making their bets.
The defining quality of the bet is that it will pay off much MUCH later.
One buys it, imitating the believers.
One avoids it, imitating cynics.
These are not mindless folks!
They have their own "reasons" for making their bets.
The defining quality of the bet is that it will pay off much MUCH later.
7/ Consider the dot-com bubble.
People jumped in hearing that the internet would revolutionize business.
Some were true believers. But many were mimics.
They could not identify a bad business as long as it "looked" good.
They placed their bets based on WHAT THEY SAW.
People jumped in hearing that the internet would revolutionize business.
Some were true believers. But many were mimics.
They could not identify a bad business as long as it "looked" good.
They placed their bets based on WHAT THEY SAW.
8/ Because the promise is so novel and high stakes, the bet becomes do-or-die.
The world has no place for both the status quo and the new idea.
Hype starts to build, and everyone starts to pick a side.
The other side isn't just mistaken, they are "delusional" or "stupid".
The world has no place for both the status quo and the new idea.
Hype starts to build, and everyone starts to pick a side.
The other side isn't just mistaken, they are "delusional" or "stupid".
9/ There are two ways this could go.
If they are lucky, people tone down their expectations.
And reality catches up.
The other possibility is ever-accelerating hype.
If they are lucky, people tone down their expectations.
And reality catches up.
The other possibility is ever-accelerating hype.
10/ As the hype reaches a point of no-return, the mimics look around.
They realise there's no one waiting in the wings to whom they can sell. And the future isn't here yet.
They panic, they sell, the bubble bursts.
And that's the end of a bubble. Unless...
They realise there's no one waiting in the wings to whom they can sell. And the future isn't here yet.
They panic, they sell, the bubble bursts.
And that's the end of a bubble. Unless...
11/ Bubbles usually have an underlying asset.
Once they burst, the asset dies.
But consider crypto.
It's purely narrative-driven.
That's why there have been multiple "bubbles" with crypto, increasing in magnitude each time.
No saying where it'll end.
So... are bubbles bad?
Once they burst, the asset dies.
But consider crypto.
It's purely narrative-driven.
That's why there have been multiple "bubbles" with crypto, increasing in magnitude each time.
No saying where it'll end.
So... are bubbles bad?
12/ Bubbles DO change the world.
Maybe not in the way that people want.
The 1840s British railroad bubble led to connectivity.
The 1920s electricity bubble led to industrialisation.
You are reading this because of the dot-com bubble.
But investors burnt their hands.
Maybe not in the way that people want.
The 1840s British railroad bubble led to connectivity.
The 1920s electricity bubble led to industrialisation.
You are reading this because of the dot-com bubble.
But investors burnt their hands.
13/ What can you take away?
Bubbles start with a strong idea.
They have the potential to change the world.
But the problem is with expectations and timeframes.
Bubbles happen because of a disconnect between imagination & reality.
Bubbles start with a strong idea.
They have the potential to change the world.
But the problem is with expectations and timeframes.
Bubbles happen because of a disconnect between imagination & reality.
14/ There are many ideas in the market now that can potentially change humanity.
Pharma.
Electric cars.
Crypto.
NFTs?
And seeing so many people on the bandwagon creates FOMO. What if we are ngmi?
Pharma.
Electric cars.
Crypto.
NFTs?
And seeing so many people on the bandwagon creates FOMO. What if we are ngmi?
15/ Mimesis is dangerous when it can affect your finances. FOMO and envy are strong motivators.
Remember, strong belief is not the same as wishful thinking looking at superficial indicators.
If you're investing because of FOMO, don't. You won't miss out on much.
There's time.
Remember, strong belief is not the same as wishful thinking looking at superficial indicators.
If you're investing because of FOMO, don't. You won't miss out on much.
There's time.
16/ This thread was inspired by the paper "Manias and Mimesis" by Tobias Huber and Byrne Hobart, and @kylascan's excellent article on narratives.
Do check it out!
cc: @Jack_Raines
Do check it out!
cc: @Jack_Raines
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