In this chapter I suggest that markets in which firms are complex and yet similar are prone to bubbles. Facing similarity and complexity, we tend to make decision by the herding heuristic. Managers are aware of our tendency to herd, and they frame their products and services accordingly. That is to say, managers try to make bubbles. I illustrate this argument. I also draw parallels between a bubble and a Ponzi scheme. They are pretty striking. Before closing I wonder if bubbles have any redeeming virtue when firms are too big, too complex, too fragile, and too similar. I manage to discover some.
KeywordsBubbles Herding Ponzi schemes
- Goyal, Sanjeev. 2007. Connections: An Introduction to the Economics of Networks. Princeton, NJ: Princeton University Press.Google Scholar
- Kadushin, Charles. 2012. Understanding Social Networks. New York: Oxford University Press.Google Scholar
- Mackay, Charles. 1841. Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. London: Richard Bentley, New Burlington Street. (Republished by L.C. Page and Company, Boston, 1932).Google Scholar
- Shiller, Robert. 2005. Irrational Exuberance. 2nd ed. Princeton, NJ: Princeton University Press.Google Scholar
- Soros, George. 2008. The Crash of 2008 and What It Means: The New Paradigm for Financial Markets. New York, NY: PublicAffairs.Google Scholar