I’ve been skimming Timur Kuran’s “Sparks and Prairie Fires: A Theory of Unanticipated political revolution” and I probably should take more time to digest it. The element of the model that didn’t really appeal to me was the seemingly exogenous shift in the threshold function that was needed to explain revolutions or to set the stage for a revolution. In many ways the model needs to be extended to include feedback effects as more agents reveal their true preferences which in theory should shift the threshold function. In any case, I say seemingly only because I haven’t taken the time to digest the model and was too busy drawing parallels with financial crises.
Here’s the abstract from Kuran’s article:
A feature shared by certain major revolutions is that they were not anticipated. Here is an explanation, which hinges on the observation that people who come to dislike their government are apt to hide their desire for change as long as the opposition seems weak. Because of this preference falsification, a government that appears unshakable might see its support crumble following a slight surge in the opposition's apparent size, caused by events insignificant in and of themselves. Unlikely though the revolution may have appeared in foresight, it will in hindsight appear inevitable because its occurrence exposes a panoply of previously hidden conflicts.
Here’s my thought on its relevance to financial crises and hence the title of the post:
A feature shared by major financial crises is that they were not anticipated. Here is an explanation, which hinges on the observation that people who believe that the economy is experiencing a bubble hide their beliefs either because of reputational or incentive effects or fear of retribution by their employers. Because of this belief falsification, an increase in stock prices that appears to be based on fundamentals might see its foundations crumble following a slight shift in sentiment, caused by events insignificant in and of themselves. Unlikely though the crash may have appeared in foresight, it will in hindsight appear inevitable because its occurrence exposes a panoply of previously hidden conflicts.
Remember Henry Blodgett who privately called a stock a ‘dog’ while rating it a buy publicly?
Here’s the abstract from Kuran’s article:
A feature shared by certain major revolutions is that they were not anticipated. Here is an explanation, which hinges on the observation that people who come to dislike their government are apt to hide their desire for change as long as the opposition seems weak. Because of this preference falsification, a government that appears unshakable might see its support crumble following a slight surge in the opposition's apparent size, caused by events insignificant in and of themselves. Unlikely though the revolution may have appeared in foresight, it will in hindsight appear inevitable because its occurrence exposes a panoply of previously hidden conflicts.
Here’s my thought on its relevance to financial crises and hence the title of the post:
A feature shared by major financial crises is that they were not anticipated. Here is an explanation, which hinges on the observation that people who believe that the economy is experiencing a bubble hide their beliefs either because of reputational or incentive effects or fear of retribution by their employers. Because of this belief falsification, an increase in stock prices that appears to be based on fundamentals might see its foundations crumble following a slight shift in sentiment, caused by events insignificant in and of themselves. Unlikely though the crash may have appeared in foresight, it will in hindsight appear inevitable because its occurrence exposes a panoply of previously hidden conflicts.
Remember Henry Blodgett who privately called a stock a ‘dog’ while rating it a buy publicly?
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