Financial hype cycle …

Here’s one for Jackie and Mark … reading Niall Ferguson’s analysis of the financial crisis (published in Vanity Fair, which surprised me), buried on page 3, there’s this description of the classic financial “bubble” in five stages:

(1) Displacement: Some change in economic circumstances creates new and profitable opportunities. (2) Euphoria, or overtrading: A feedback process sets in whereby expectation of rising profits leads to rapid growth in asset prices. (3) Mania, or bubble: The prospect of easy capital gains attracts first-time investors and swindlers eager to mulct them of their money. (4) Distress: The insiders discern that profits cannot possibly justify the now exorbitant price of the assets and begin to take profits by selling. (5) Revulsion, or discredit: As asset prices fall, the outsiders stampede for the exits, causing the bubble to burst.

Well, the terms are different but the shape is the same!

Incidentally, if you’re like me a regular visitor to the US who has always wondered what Fannie Mae and Freddie Mac are, Niall Ferguson explains that too!

Oh, and how did I come across this reference? Oddly enough, through Forrester’s CEO. The link is in George Colony’s most recent posting on his Counterintuitive blog. Watch for discussion in the comments there.

• Wall Street lays another egg, Niall Ferguson, Vanity Fair, Dec 2008
• Best Explanation of the Financial Mess, George Colony, Counterintuitive, Forrester Research, 15 Dec 2008
• Mastering the Hype Cycle, Jackie Fenn and Mark Raskino. Gartner blogs (and see my recent post)

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