4min chapter

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Rational Minds Part 4: The Blind Leading The Blind - David Hirshleifer

The Joe Walker Podcast

CHAPTER

The Effect of Bias on the Stock Market

In these models people have private information signals that help tell them how much an asset is worth. We modify that model in just a little way which is what if when I share information with you I bias that information. It could be a very small bias. Maybe it's an optimistic bias. So the numbers of signals are growing exponentially so we're updating our beliefs more and more strongly based on the signals but sadly the biases are accumulating as well. And so the effect of that is that you get a bubble and the bubble starts out growing slowly but as the biases and signals accumulate it starts getting faster and faster until you get explosive growth of the bubble. Finally ultimately as public information arrives that gets more

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