Why bubbles happen


Scan originally appeared in Wired 07.03, march 1999

This ad is from March 1999, so I’ll give you one good reason why you shouldn’t have invested - unless you sold at the right time:

It’s easy to do Monday morning quarterback on the bubble. The fact is, we just went through another on the real-estate and credit market, and while the good times lasted, we all joined the dance and lived on credit and in houses we really couldn’t afford.

So why are these unsustainable financial products offered in the first place? I read a scary interview with an investment-banker - here's his theory:

The world of investment bankers has no collective memory, and here’s why: These guys are on short term bonus plans. While the market goes up, the smart, aggressive bankers make gold, surfing the cusp of the wave and retire. The equally smart but careful ones underperform and are either fired or never move up ranks. Leaving the mediocrity left in powerful positions. And the mediocre aren’t capable of stopping a wave – they will follow the herd and strengthen whatever’s going on, be it "invest in IT" or "buy real-estate". And when it crashes, the mediocre learn and become the careful ones in the next wave. At the root are the short-term bonuses – they have to go, if we are to learn from this.

That makes sense to me.

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