The Psychology Engine

Bubbles are fundamentally psychological. Herd behavior, overconfidence, and the fear of missing out combine to override clear thinking in otherwise intelligent people. The smarter you are, the better you become at justifying the price.

Isaac Newton lost a fortune in the South Sea Bubble. A remark often attributed to him captures the lesson: "I can calculate the motion of heavenly bodies, but not the madness of people." Even brilliant minds give in when everyone around them appears to profit from ignoring the fundamentals.