Monday, December 31, 2007

Alarmism and Rational Panic

Two commenters have pointed out that my last post seems excessively alarmist.

I think I may have obscured my own point. I am not attempting to get people to sell in a falling market, so much as admitting that the only honest advice I could give is to sell in a falling market. Given that I think people will eventually find their way to optimality, this indicates to me that the market response will be different than in times past.

There is good chance that the point will come where Floridians realize that to some extent this is a game of who can get out first. I think first mover advantages can cause rational bubbles, that is, bubbles in which each individual agent has a private incentive to buy into the bubble. In the same way a first mover advantage has the potential to create rational panic.

Given that rational panic is probably extremely rate in housing, I don't think the past will be a good guide for the future.

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