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Sunday, August 14, 2011

"What is a Bubble?"

"[I]n bubbles, people stop taking positions based on underlying information, and start taking positions based on price. In other words, the entire market becomes trend following. If you take a position based on price, and everyone else starts to do the same thing, the prices will rise faster than exponentially via feedback. So, if you take the log of the price series, and notice stuff with super linear growth: those are bubbles."

Posted by CP at 4:56 PM

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