Years of Poems and Spirits

Continuing from yesterday long blog. Bill added the comment that “Stock market is far from being rational”. I can see where he comes from, but I don’t think we can dismiss the entire “efficient market hypothesis” (EMH) because of this crisis. After all, there is solid theoretical and empirical foundation underlying EMH, e.g. the decision market experiment and the asymmetric information theory, etc.

Instead, I’d posit that it is reasonable to compliment EMH with Soros’ Reflexivity: in normal times when there are competing sources of information that result in widely distributed asymmetric knowledge islands and none is dominantly more significant than any other, EMH holds. However, under the right condition, the market could become suddenly and increasingly self-destructive. In plain English, it is a time when self-fulfilling prophecy run amok.

In other words, if we call the EMH state a “rational state”, the “Reflexivity” state an “irrational state”, what intrigues me is under what condition would the rational moving irreversibly toward the irrational? It is not quite the same as the “tipping point” where a stable state/system changes into another stable state/system. In this case, it is a point where a stable system suddenly and irreversibly change into a self-destructive system. Or, more to the point here, a rational state into a irrational state.

I may be stretching here, but is it fair to say that American public opinion (or call it collective cognition) experienced a similar transition after 9.11? A shock happened, then a relatively mild stable and rational public suddenly degenerated into irrational fear, which  drained the vitality (spiritual and materially) out of an otherwise healthy society?

Even if we don’t get distracted by politics, I still think the question I asked earlier is a significant one.  However, I am not sure whether this phenomenon is related to human behavior only or it exists in any system? For example, can we apply this pattern to explain why some species survived evolution but some extincted? Hmm … do we want our financial system to be like cockroaches or dinosaurs?

Another good evening in my life  is thus totally ruined.