The Science of Economic Bubbles and Busts

From Scientific American: The Science of Economic Bubbles and Busts

The worst economic crisis since the Great Depression has prompted a reassessment of how financial markets work and how people make decisions about money:

Key Concepts

• The worldwide financial meltdown has caused a new examination of why markets sometimes become overheated and then come crashing down.
• The dot-com blowup and the subsequent housing and credit crises highlight how psychological quirks sometimes trump rationality in investment decision making. Understanding these behaviors elucidates the genesis of booms and busts.
• New models of market dynamics try to protect against financial blowups by mirroring more accurately how markets work. Meanwhile more intelligent regulation may gently steer the home buyer or the retirement saver away from bad decisions.