people are most credulous when most happy
February 19, 2013, 11:32 pm
Filed under: brave new world | Tags: , ,

buy sellThe economist Galbraith describes two classes of investor / speculator:  class no. 1 who believe utterly and finally that markets can and will continue to make them richer and richer indefinitely; and class no. 2 who go all in, but in a slightly more measured way, have made plans to get out.

More entertaining than the descriptions of speculator type no. 1 and speculator type no. 2 is Galbraith’s rumination on the psychology behind it all.  Vanity thy name is … speculation:  players of the market game convince themselves of their own great genius in direct proportion to the lucre brought in.

There is an ultimate step:  from ‘success’ to vanity to credulity.

Here is Galbraith:

The price of the object of speculation goes up. Securities, land, objects d’art, and other property, when bought today are worth more tomorrow. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet buy; the increase continues. The speculation building on itself provides its own momentum.

There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up perhaps indefinitely.  It is adjusting to a new situation, a new world of greatly or even infinitely increasing returns and resulting values.  Then there are those superficially more astute and generally fewer in number who perceive or believe themselves to perceive the speculative mood of the moment.  They are in to ride the upward wave; their particular genius , they are convinced, will allow them to get out before the speculation runs its course.  They will get the maximum reward from the increase as it continues; they will be out before the eventual fall.


Speculation buys up, in a very practical way, the intelligence of those involved.

This is particularly true of the first group noted above–those who are convinced that values are going up permanently and indefinitely. But the errors of vanity of those who think they will beat the speculative game are also thus reinforced. As long as they are in, they have a strong pecuniary commitment to belief in the unique personal intelligence that tells them there will be yet more. In the last century, one of the most astute observers of the euphoric episodes common to those years was Walter Bagehot, financial writer and early editor of The Economist. To him we are indebted for the observation that “all people are most credulous when they are most happy.”

John Kenneth Galbraith, A History of Financial Euphoria


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