http://www.ohio.com/editorial/commentary/16246947.html?page=1&c=y

The Akron Beacon Journal discusses the recent housing bubble and the failure of economic experts to recognize the problem. They quote Alan Greenspan’s autobiography, saying, “I’d come to realize that we’d never be able to identify irrational exuberance with certainty, much less act on it, until after the fact”. The article introduces the concept of information cascades as the major reason for the housing bubble and tech bubble of the laste 1990’s. A buyer’s willingness to pay a high price for a house will influence later buyers into (perhaps irrationally) thinking that similar houses have a high value as well.

The reasoning presented in this article is very similar to the model for information cascades that was presented in class. It seems like quite a strong statement to say that we’ll never be able to identify irrational exuberance. When conducting analysis on the housing or stock markets, perhaps we should always assume there is a level of irrational exuberance caused by information cascades. A model could be developed to determine how much the apparent market figures need to be modified in order to counteract the effects of information cascades. In such a large economy, the prevelance of information cascades (presented as a discrete phenomenon in class) would average out to some computable value. It seems like this sort of reasoning would be very beneficial in recognizing bubbles before they burst.