“A thorough understanding of history and human psychology should
better equip investors to understand the warning signs, the opportunities
and the pitfalls associated with the formation of bubbles”
PROFILE – FACT BOX
Kindleberger/Minsky framework for over and over again, often in a slightly
analysing bubbles, which breaks a more unstable version.”
bubble’s progress into fi ve phases:
• Displacement; EUPHORIA
• Credit creation; Everyone starts to buy into the new era.
• Euphoria; Prices are seen as capable only of ever
• Critical stage/fi nancial distress; going up. Traditional valuation standards
• Revulsion. are abandoned and new measures are
introduced to justify the current price. A
DISPLACEMENT wave of over-optimism and over-
Displacement is generally an exogenous confi dence is unleashed, leading people
shock that triggers the creation of profi t to over-estimate the gains, under-
opportunities in some sectors, while estimate the risks and generally think
closing down profi t availability in they can control the situation.
others. As long as the opportunities
created are greater than those shut CRITICAL STAGE/
James Montier
down, investment and production will FINANCIAL DISTRESS
pick up to exploit these opportunities. Th e critical stage is often characterised
Career highlights:
Investment in both fi nancial and by insiders cashing out and is rapidly
James Montier is the global strategist at
physical assets is likely to occur. followed by fi nancial distress, in which
Société Générale and previously worked
Eff ectively, we are witnessing the birth the excess leverage that has been built
at Dresdner Kleinwort. He has been the
of a boom. up during the boom becomes a major
top rated strategist in the annual Extel
problem. Fraud also often emerges
survey for the past three years and in
CREDIT CREATION during this stage of the bubble’s life.
2007 he was the highest rated analyst
Just as fi re cannot grow without oxygen,
across all sectors in the Extel survey. He
so a boom needs liquidity to feed it. REVULSION
is a visiting fellow of Durham University
Minsky argued that monetary expansion Th is is the fi nal stage of a bubble’s life
and a fellow of the Royal Society of Arts.
and credit creation are largely cycle. Investors are so scarred by the
He has written two books on behavioural
endogenous to the system. Th at is to events in which they participated that
fi nance (both published by Wiley,
say, not only can money be created by they can no longer bring themselves to
Behavioural Finance in 2000, and
existing banks (inside money) but also participate in the market at all. Revulsion
Behavioural Investing in 2007).
He has been described as the City’s best
by the formation of new banks, the is characterised by exceptionally cheap
known research brain by the Financial
development of new credit instruments, asset prices and bargain valuations often
News in the 2007 Rising Star awards, a
the use of leverage and the expansion of bought about by forced sellers.
maverick by The Sunday Times, an enfant
personal credit outside the banking
terrible by the FAZ, an iconoclast by the
system (outside money). IN CONCLUSION
FT and a prophet by the Fast Company.
JK Galbraith wrote: “As to new A thorough understanding of history
fi nancial instruments, however, and human psychology should better
experience establishes a fi rm rule... that equip investors to understand the
fi nancial operations do not lend warning signs, the opportunities and the
themselves to innovation. What is pitfalls associated with the formation of
recurrently so described and celebrated bubbles, but as Galbraith said: “Th ere
is, without exception, a small variation can be few fi elds of human endeavour
on an established design... Th e world of in which history counts for so little as
fi nance hails the invention of the wheel the fi eld of fi nance”.
18 WINTER 2008/09
blackblack swan.indd 18swan.indd 18 27/11/0827/11/08 15:51:2915:51:29
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