Rational analysis is overshadowed by emotional impulses during financial bubbles from "summary" of A Short History of Financial Euphoria by John Kenneth Galbraith
In the heady moments of a financial bubble, rational analysis often takes a back seat to emotional impulses. Investors get caught up in the frenzy of rising prices and the promise of quick profits, leading them to make decisions based more on excitement and greed than on careful consideration of the facts. As John Kenneth Galbraith explains in 'A Short History of Financial Euphoria,' this shift from rationality to emotion is a common feature of speculative manias. During a bubble, the prevailing sentiment among investors is one of euphoria and optimism. People believe that they have discovered a foolproof way to make money and that the good times will never end. In this atmosphere, anyone who questions the wisdom of the crowd is dismissed as a pessimist or a spoilsport. Rational analysis, with its emphasis on prudence and risk management, is seen as out of touch with the prevailing mood of exuberance. The main driving force behind this shift in mindset is the fear of missing out. As prices continue to soar, investors become increasingly anxious that they will be left behind if they do not join the party. This fear feeds into a cycle of irrational behavior, as people rush to buy assets simply because they believe that others will want to buy them at an even higher price in the future. In this way, the bubble becomes self-reinforcing, with rising prices attracting more buyers, which in turn drives prices even higher. Despite the obvious signs of excess and speculation, many investors are unable to rein in their emotions and take a more rational approach to investing. The allure of quick riches and the excitement of being part of a financial mania are simply too strong to resist. As Galbraith notes, it is only after the bubble has burst and the market has crashed that people come to their senses and realize the folly of their actions. By then, however, it is usually too late, and the damage has already been done.
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