Just Talking About The Bubble Will Accelerate its Bursting

Trying to pin-point when the bubble will burst requires looking at the hard data, statistics, and historical context. However, Robert Schiller argues in today’s Wall Street Journal that investor psychology has a lot to do with when a trend ends.

[“What makes for sudden sharp reversals of trend and sudden drops in home prices? There is no received doctrine among the experts on this point, basically since there are not many major real-estate bubbles to study, and the few that we do have to look at have more special events as part of them than we can possibly sort through. With so many relevant economic factors, it is too easy for economists to overfit their models and delude themselves into thinking that economic fundamentals explain everything, with no need to resort to investor psychology.

But prices in speculative markets are ultimately determined in people's minds, by what they are willing to pay. If people change their minds, prices can change instantly and dramatically. Something has been going on in the minds of Americans that has been leading to an ever-strengthening housing market starting in 1997. That something can change.”]