Chapter 1: The Speculative Episode
Anyone taken as an individual is tolerably sensible and reasonable – as a member of a crowd, he at once becomes a blockhead. Friedrich von Schiller
The more obvious features of the speculative episode are manifestly clear to anyone open to understanding, Some artifact or some development, seemingly new and desirable – tulips in Holland, gold in Louisiana, real estate in Florida, the superb economic designs of Ronald Reagan – captures the financial mind, or perhaps more accurately, what so passes. The price of the object of speculation goes up. The price of the object of speculation goes up. Securities, land, objets d’art, and other property, when bought today, are worth more tomorrow. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet more buy; the increase continues. The speculation building on itself provides its own momentum.
This process, once it is recognized, is a clearly evident, and especially so after he fact. So also, if more subjectively, are the basic attitudes of the participants. These take two forms. There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall.
For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participants in the speculative situation are programmed for sudden efforts at escape. Something, it matters little what – although it will always be much debated – triggers the ultimate reversal. Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang. There will be occasion to see the operation of this rule frequently repeated.
— A Short History of Financial Euphoria, John Kenneth Galbraith, Viking, 1990, p. 2-4.