Euphoria can lift housing and dot-com prices; panic can send sound banks tumbling.
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The complexity of the world in which we live exceeds our capacity to comprehend it.
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A boom/bust process occurs only when market prices find a way to influence the so-called fundamentals that are supposed to be reflected in market prices.
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I assume that markets are always wrong. Even if my assumption is occasionally wrong, I use it as a working hypothesis.
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The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it.
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Financial markets are inherently unstable; stability can be maintained only if it is made an objective of public policy. Moreover, instability is cumulative.
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We start with the assumption that the stock market is always wrong, so that if you copy everybody else on Wall Street you’re doomed to do poorly.
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I start with the assumption that the market is always wrong and that there is a divergence between the way people look at a situation and what the situation is.
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Analysts generally regard the stock market as the passive reflection of investors’ expectations. But in fact, it is an active force in shaping them.
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Equilibrium applies best only to markets that deal with known quantities. But financial markets deal with quantities that are not only largely unknown but unkownable.
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The reality is that financial markets are self-destabilizing; occasionally they tend toward disequilibrium, not equilibrium.
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Risk is when there are multiple possible future states and the probabilities of those different future states occurring are known.
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The achievements of natural science stand as convincing testimony to man’s ability to use reason. Unfortunately, these achievements do not ensure that human behavior is always governed by reason.
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Market prices of financial assets do not accurately reflect their fundamental value because they do not even aim to do so. Prices reflect market participants’ expectations of future market prices.
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Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend.
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