Saturday, November 3, 2012

Greed and fear

From The Signal and the Noise by Nate Silver. Page 38.
Usually, in Summers's view, negative feedbacks predominate in the American economy, behaving as a sort of thermostat that prevents it from going into recession or becoming overheated. Summers thinks one of the most important feedbacks is between what he calls fear and greed. Some investors have little appetite for risk and some have plenty, but their preferences balance out: if the price of a stock goes down because a company's financial position deteriorates, the fearful investor sells his shares to a greedy one who is hoping to bottom-feed.

Greed and fear are volatile quantities, however, and the balance can get out of whack. When there is excess greed in the system, there is a bubble. When there is an excess of fear, there is a panic.

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