In a poll conducted earlier this week in the CFA Institute Financial NewsBrief, we asked readers, “What is the primary cause of speculative investment bubbles?”
Poll: What is the primary cause of speculative investment bubbles?
Nearly 38% of global respondents to this week’s poll think the behavioral biases of investors are the primary cause of investment bubbles, while 33% of those polled believe responsibility lies with central banks and their easy money policies. Excessive leverage (19%) and government policies (7%) were less favored responses. While investment bubbles are often induced by a confluence of factors, behavioral concepts such as herding and extrapolation are often at play when it comes to speculative bubbles. Similarly, moral hazards, a common unintentional consequence of government policy, alter investor behavior by lowering perceptions of risk and, in turn, driving up asset prices.
Accommodative monetary policy of central banks is also often behind speculative bubbles, and the real estate bubble of the last decade, fueled in large part by the ultra-low interest rate environment, is a prime example. Interestingly, 49% of poll respondents from the Asia Pacific region see central bank policies as the primary cause of investment bubbles — perhaps not surprising in light of the meteoric rise in Japanese stocks in response to aggressive monetary easing recently undertaken in that country.
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