Review: Bursting the Bubble

Although the topic is somewhat narrow, Bursting the Bubble is a really thoughtful look at stock market bubbles of the past, and, if nothing else, is interesting for its premise alone- that the evidence for the existence of market bubbles is dubious.

You may be scratching your head- we know bubbles exist; but maybe they don't or perhaps they need to be redefined? There are many instances in history where prices have went up rapidly then dropped quickly, undergoing 'market correction'. The point David DeRosa makes is that this way of viewing the market is problematic.

When we look back at the market, we can identify bubbles in hindsight because prices rose (not 'are rising') or because they (supposedly) occurred. Similar to hindsight bias in psychology, as we are incorporating ex post information that could not have been known ex ante. Perhaps this is the crux of the issue.

This is further compounded by the book examining how bubbles conform to the well established fundamentals of finance. For example, neoclassical finance can hold either of two positions: 1. if investors are rational and pay the fundamental value for stock, there are no bubbles, or 2. inefficient prices get arbitraged away, also removing the room for bubbles. Arguing, of course, that the undeniable presence of bubbles would invalidate market efficiency concepts.

Anyways, this is recommended for anyone interested in the topic and it goes much deeper on topics such as looking at time series analyses and excess volatility, for example. You should probably have some math or finance background before reading this, as it is somewhat technical, probably sitting between Behavioral Finance (Meir Statman) and Goals Based Investing (Franklin Parker) in terms of math.

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