Three
Amplification Mechanisms:
Naturally Occurring Ponzi Processes

In the previous chapter we examined a number of disparate factors that have precipitated the present speculative bubble. In this chapter we consider how the effect of these factors is amplified by mechanisms involving investor confidence, investor expectations for future market performance, and related influences on investor demand for stocks. To provide context and concreteness, we shall first examine evidence about investor confidence and expectations.

The amplification mechanisms work through a sort of feedback loop; later in this chapter they will also be described as a type of naturally occurring Ponzi process. Investors, their confidence and expectations buoyed by past price increases, bid up stock prices further, thereby enticing more investors to do the same, so that the cycle repeats again and again, resulting in an amplified response to the original precipitating factors. The feedback mechanism is widely mentioned in popular discourse as merely a hypothesis, often regarded as unproven. In fact, there is some evidence in support of such a feedback mechanism, as we shall see.

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