Bubbles: Pursuing Past Performance

Mar 2013 //
Bubbles
Behavioral Finance

As mentioned earlier, many tech stock prices became inflated in the late 1960s.  However, that episode paled in comparison with the tech stock bubble of the late 1990s.  (It took 30 years for investors to forget what happened in the 1960s, I guess.)  The 1990s tech stock bubble is recent enough that I don’t think I need to dwell on its particulars, other than to say it represented yet another instance of real investment risk becoming very high, because most investors believed it was low—and ultimately becoming quite low (after the bubble burst) when most investors believed it to be high.  One more point:  After the miserable experience many investors had in stocks a dozen years ago, many decided to greatly reduce their stock investments in favor of something that always seemed to grow.  That something was real estate, which then became overly popular by 2006.  Thus, it is accurate to say that the severity of the most recent, real-estate-led recession was partly caused by yet another episode of investors fleeing what had previously performed poorly (stocks) in order to pursue what had already performed very well (home prices).