In contrast to the preceding three papers, his new 'Bubbles, gullibility, and other challenges for economics, psychology, sociology, and information sciences' [PDF] is primarily about the internet/telco bubble and future bubbles. It offers a persuasive analysis of issues such as innumeracy and incisive comment on people who were sincere, charismatic but alas often very wrong.
Odlyzko suggests that -
Gullibility is the principal cause of bubbles. Investors and the general public get snared by a "beautiful illusion" and throw caution to the wind.He goes on to comment that -
Attempts to identify and control bubbles are complicated by the fact that the authorities who might naturally be expected to take action have often (especially in recent years) been among the most gullible, and were cheerleaders for the exuberant behavior. Hence what is needed is an objective measure of gullibility.
This paper argues that it should be possible to develop such a measure.One conclusion from recent reading of Fintan O'Toole's spirited Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger (PublicAffairs, 2010) and Asgeir Jonsson's Why Iceland? How One of the World's Smallest Countries Became the Meltdown's Biggest Casualty (McGraw-Hill, 2009) is that regulators need both the resources required for effective supervision of markets and a mindset in which that supervision is taken seriously.
Examples demonstrate, contrary to the efficient market dogma, that in some manias, even top-level business and technology leaders do fall prey to collective hallucinations and become irrational in objective terms. During the Internet bubble, for example, large classes of them first became unable to comprehend compound interest, and then lost even the ability to do simple arithmetic, to the point of not being able to distinguish 2 from 10. This phenomenon, together with advances in analysis of social networks and related areas, points to possible ways to develop objective and quantitative tools for measuring gullibility and other aspects of human behavior implicated in bubbles. It cannot be expected to infallibly detect all destructive bubbles, and may trigger false alarms, but it ought to alert observers to periods where collective investment behavior is becoming irrational.
The proposed gullibility index might help in developing realistic economic models. It should also assist in illuminating and guiding decision making.
O'Toole offers pertinent comments on Australia and Ireland's experience of HIH and James Hardie, highlighting issues that regrettably have not featured in the current national election campaign and that have had a more fundamental impact on the nation's economic performance and well-being than the pink batts affair.
It is thus heartening to see reports of Ross Garnaut's Hamer Oration at Melbourne University last night,which argued that recent growth masked that something had "gone wrong with political culture and economic policy".
Garnaut is reported as suggesting that declines in productivity over the past decade are attributable to the failure of Australian governments to build on the economic reforms of the 1980s and 1990s.
The SMH indicates that -
In a cross-policy attack, Professor Garnaut accused Julia Gillard and Tony Abbott of a "'breathtaking sidestepping of responsibility" by treating urban infrastructure and transport bottlenecks as a debate about population immigration.Slate meanwhile features a short review of Sex, Drugs, and Body Counts: The Politics of Numbers in Global Crime and Conflict (Cornell University Press, 2010) edited by Peter Andreas & Kelly Greenhill. After a week of marking essays on crimes such as human trafficking and outworking I endorse the editors' comment that readers should ask questions when confronted with numbers -
"The change [on population] has large implications, but has been accompanied by no analysis of economic growth and incomes", he said.
Neither party had a plan to deal with climate change and Australia's position on the issue was "an extraordinary failure of leadership".
Professor Garnaut said Kevin Rudd abdicated leadership by listening to advisers who rated lobbying by special interest groups and "inchoate reactions" from poorly informed members of the community above majority public support for action.
Ms Gillard was now accepting similar advice, he said, and may be on a similar path.
Where do the estimates come from, who produces them, what legitimating function do they serve, and how (if at all) are they explained in official reporting? What are the implications and consequences (intended and un-intended) of choosing one set of numbers over another? To what degree are the numbers accepted or challenged, and why? What purpose do they serve? ....
Numbers should provoke especially tough questions when the activity being measured is secretive, hidden, and clandestine. "How could they know that? How could they measure that?"
