Why it's called irrational exuberance ....

Over the last years , I've seen many predictions of how much growth there will be in a particular market , some times they get it right , but when the markets are moving strongly they never do . They always underestimate the strength of the movement .

Why ? Because it's not rational . It's not based on statistical analysis or economic theory or even affordability ......

I t's based on human emotion and that is always irrational , and that lack decision making is and always be an integral part of us as a race . It's not going to change .

So when I see a ( presumably statistically based ) based prediction on how much a particular market will move I look at the circumstances around it .

The prediction of interest for me was this one

Macquarie Capital?s Rod Cornish suggests that interest rates look like staying low for longer than he'd originally thought - which may impact prices.

Without a rate rise, Sydney would reach the tipping point ? where the strongly growing market would change ? after another 15% price rise, he told the Australian Financial Review.

But he forecasts if rates were to rise 1%, perhaps in 2015, then that market change point would be hit after a 7% price rise.

"If rates were to rise 0.5%, the tipping point would be reached after a 10% house price rise," he said.


I haven't seen to many people prepared to put a figure on how much Sydney might move in the near future , but I'm assuming this one will have had a reasonable amount of analysis done to predict how much the market might move based on affordability , wage growth , bank lending practices etc . So for me it's probably a logical prediction.

Now , I don't know whether Sydney will move strongly , the next six months will tell , but I won't be surprised if sydney does move strongly at the moment , ther is a good chance that it will be by more than 15 % .

That would be irrational , wouldn't it ...:cool:

Cliff
 
Just because an economic model cannot explain it, certainly doesn't make it irrational.

Rationality is a concept created by economists to try and help fit the real world into their models of behaviour.

If something doesn't fit their model it is far easier (and more palatable) to label that event or decision "irrational" than it is to admit the limitations of their model (and hence themselves).


(I said that on SS over 10 years ago btw)

Doesn't mean they don't get over-exuberant on occasions.

But I wouldn't call it irrational.
 
Just because an economic model cannot explain it, certainly doesn't make it irrational.

Rationality is a concept created by economists to try and help fit the real world into their models of behaviour.

If something doesn't fit their model it is far easier (and more palatable) to label that event or decision "irrational" than it is to admit the limitations of their model (and hence themselves).


(I said that on SS over 10 years ago btw)

Doesn't mean they don't get over-exuberant on occasions.

But I wouldn't call it irrational.

Mark , you're probably the most logical economist I've . That's not saying much because you're about the only economist I've met ;)

Unfortunately ( at least in public ) most of your colleagues aren't so open about their failings . You may not call it irrational , but it is a term that has gained a certain meaning in debates about assets . The same way that the term bubble has been discount to mean a strong move , as opposed to it origins to describe such events as tulip mania and the south sea bubble .

Alan Greenspan seems to be blame for starting its use

Cliff
 
Look at the past to predict the future.

What has happened after each previous property boom? - price stagnation.

What's different now as compared to prior booms? - constant low interest rates

IMO as soon as rates rise then this boom is over. I think rates will stay low till the US and European economies right themselves.

Could be five years - I don't know. In the mean time make hay while the sun shines lol.
 
The key to being a good investor is knowing when to sail in the wind.

Unfortunately too many people are too smart, and have packed their bags and gone home before the wind starts.
 
The key to being a good investor is knowing when to sail in the wind.

Unfortunately too many people are too smart, and have packed their bags and gone home before the wind starts.

Hi Deltaberry , I love that quote .

Where did it come from ? or is it an original ?

Cliff
 
It's all in the charts :D

market-emotion-cycle.jpg



Greed & Fear (Maybe a touchof Mob Mentality) ?

buy-buy-buy-the-stock-market.jpg


?A bull market is like sex. It feels best just before it ends.?
Barton Biggs

If your in the game, enjoy the run though :D
 
Hi Deltaberry , I love that quote .

Where did it come from ? or is it an original ?

Cliff

Original quote. I wanted to write about riding the wave originally, but packing your bags and going home before the wave comes is almost a good thing if it's a tsunami. So changed it to sailing and wind.
 
...irrational exuberance?

http://www.macrobusiness.com.au/2014/09/meanwhile-on-the-bubble-front-line/

The property sold for $1.1 million to an Indian investor ? which is overvalued by about 20% ? but it is about what you would expect in this market.

After a 30 day settlement the property went up for auction with Ray White at the start of August 2014.

The auction was on Saturday (6 September 2014) and sold to a Chinese man for $1.365 million.

That is an increase of $265,000 or 24% over 60 days.
 
The key to being a good investor is knowing when to sail in the wind.

Unfortunately too many people are too smart, and have packed their bags and gone home before the wind starts.

Modify that,
The key to being a good trader is knowing when to sail the in the wind.

The key to being a good investor is knowing when all the ships are in port because the predicted winds are too strong. Yet knowing this, the intelligent investor knows that the shipping transport rates are up significantly because of this, yet the shipping stock prices are low, because too many people are focused on the fact that the ship is in port.
 
The Indian Investor seemed to know he was onto a winner

Who knows redwing.

But as far as I am concerned its similar to gossip. Its a micro example.

Why does everyone focus on the micro?

Its just like the news. When ever they want to highlight a point, they always find someone to present the micro view.

I am not interested in micro views.

Far too much risk of stasticial distortion.
 
Why does everyone focus on the micro?
I rarely focus on the micro, it was just an example. I usually am focused more on bigger picture figures such as investors as % of market, finance figures, rate of growth compared with previous peaks, auction clearance rates, etc.

But I have seen some of the Melbourne investors on here saying ridiculous prices are being paid in Melbourne too.
 
Who knows redwing.

But as far as I am concerned its similar to gossip. Its a micro example.

Why does everyone focus on the micro?

Its just like the news. When ever they want to highlight a point, they always find someone to present the micro view.

I am not interested in micro views.

Far too much risk of stasticial distortion.

Isn't looking for intrinsic value in an individual company a micro (individual company) rather than a macro (the market)?
 
Also , macro is just the summation of all the micro changes and you can only measure it after it's happened .

For me , micro is listening to what is happening on the forum and in the past it's been accurate at predicting what is going to happen on the macro level .

Cliff
 
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