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Shiller p 49 professor schulze aem 414 lecture 10

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Unformatted text preview: his money parked in bank CDs. He has missed the entire bull market… Even now he does not realize that there is never a perfect time. When the market recovers from a pullback it generally goes to new highs.” (Shiller p 49.) Shiller 49.) Professor Schulze AEM 414 AEM Lecture 10 Causal Factors (cont.) Note that the story utilizes loss aversion! Joe could be rich (the reference point) but he regrets that he is poor. Don’t end up regretting your mistake too and be a schmuck. Get into the market now! (At high prices.) AEM 414 AEM Professor Schulze Lecture 10 Causal Factors (cont.) The popularity of this Ponzi approach is reflected in The approach books and magazine articles with titles like: – “Everybody Ought to be Rich,” Ladies Home Journal (1929) – The Millionaire Next Door NYTimes Best Seller The Best (1996) – The Road to Financial Freedom: A Millionaire in Seven Years best seller in Germany (1999) Seven best – The Nine Steps to Financial Freedom (1999) – The Courage to be Rich (1999), etc. The (1999), Professor Schulze AEM 414 AEM Lecture 10 How Does The Ponzi Scheme Work How Scheme Assuming You Can Find Suckers? Feedback theory uses adaptive expectations to explain both the Ponzi scheme and bubbles. both scheme In the case of bubbles, price increases lead people to believe that there will be more price increases for stocks. However, the price increases cannot continue indefinitely because eventually people run out of money to invest or there are no suckers left. Because prices are supported only by the expectations of further price increases (not earnings), when people run out of money to buy high priced stocks, the bubble collapses and values return to those based on earnings alone (or below). Professor Schulze AEM 414 AEM Lecture 10 Ponzi Scheme Ponzi Scheme A Ponzi scheme works the same way in that is you sell Ponzi way f...
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