Steering clear of the Red Sea Bubble

TulipsBubbles are fascinating. I mean economic bubbles, not the sort you get in the bath, although they’re quite interesting too. Start again…

Economic bubbles are fascinating. However rational we think we are, a mixture of greed and a belief that it must make sense if everyone else is doing it leads people to act in ridiculous ways. Never mind that there have been bubbles throughout history and they’ve always ended badly, people are always lured into the latest one, from tulips to derivatives and now Bitcoin, and unsurprisingly get burnt.

The South Sea Bubble is one of my favourite curiosities, just for the intriguing stories about it. Sir Isaac Newton, one of the greatest minds of his time, invested in the Bubble early, before selling up for a healthy profit, all of which could be justified as rational behaviour. But stock continued to rise, he saw everyone around him making a killing, and he returned to the market with an even greater investment. He ended up losing a fortune.

Newton’s story is typical of the way people handle market bubbles – even when they see the risks, the sheer number of people who are investing makes it hard to believe that they could all be wrong. We’re social animals, and we have a natural tendency to believe in the wisdom of crowds.

This determination to ignore the warning signs is revealed by some of the fanciful companies that were started up at the time. My favourite story is of an attempt to raise money for “A company for carrying on an undertaking of great advantage, but nobody to know what it is”, but sadly, like so many good stories, this may be exaggerated, misrepresented or fabricated.

BubbleWhen everyone around us is doing one thing, it becomes very difficult to go against the flow, and very easy to surrender responsibility for our choices to a popular vote. There must be something in it, fifty million Frenchmen can’t be wrong, and so on. It’s irrational, but how often do you hear this sort of argumentum ad populum in one form or another?

This becomes very obvious in the context of religion. People (and I include myself in this) are incredibly willing to suspend their disbelief in the face of personal testimony of one sort or another. “I know it seems strange, but it really works, you just have to believe. Give it a try. Honestly, it makes perfect sense if you’d just open your mind.”

That’s a very familiar appeal, in some cases insisting on ever greater commitment. If you still don’t get it, you need to have more faith, and more and more – not so much Pascal’s Wager as Pascal’s Martingale, with every failure prompting an increase in the stake.

Popular appeal doesn’t offer any guarantee of quality or accuracy, or The Sun would be the best newspaper in the UK and Ice Age: Continental Drift would be one of the five best films released last year. Sometimes, people can be very, completely, absolutely wrong.

Images courtesy of 12sira34 and livienne, used with permission

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About Recovering Agnostic

I'm Christian by upbringing, agnostic by belief, cynical by temperament, broadly scientific in approach, and looking for answers. My main interest at the moment is in turning my current disengaged shrug into at least a working hypothesis.

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