Bubbles, Human Judgment and Expert Opinion.” Cowles Foundation Discussion Papers 1303

Abstract: Research in psychology and behavioral finance is surveyed for evidence to what extent experts such as professional investment managers or endowment trustees may behave in such a way as to help perpetuate speculative bubbles in financial markets. This paper discusses scholarly psychological literature on the representativeness heuristic, overconfidence, attentional anomalies, self-esteem, conformity pressures, salience and justification for insights into weaknesses in expert opinion. The role of the prudent person standard and the news media in influencing experts is considered. The relevance of the literature on testing of the efficient markets theory is discussed. The widespread public disagreement about whether the stock market has been undergoing a speculative bubble in the past few years reflects an underlying disagreement about how to view human judgment and intellect. There are many who have been arguing in effect that the market (or major components of it) has been undergoing a bubble. These include some who write for The Economist, The Wall Street Journal, and Barron’s. It would seem that it is essential to their notion of a bubble that investors ’ actions are, in one way or another, foolish