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IRRATIONAL EXUBERANCE AND THE STOCK MARKET CRASH IN 1929.
HUYNH NGOC PHUONG DUYEN K49 CLC2 1001017052
South Korea. not to say wonderful. the situation in the market was not a downward trend as the table shows.2% 2. Malaysia. Stock market in Asia (such as Hong Kong. Japan) also made spectacular gain.000.600 in 1994.9% 4% 4% 2. Alan Greenspan. Alan Greenspan’s speech. The stock market valuation in Germany. Spain and United Kingdom roughly doubled.I. it had passed 11. but they are first combined and used by Mr. The Dow Jones Industrial Average stood at around 3. We can look at the table below to see the epidemic phenomenon in the market at that time: Country Japan Hong Kong Germany Britain USA Nikkei index Hang Seng DAX FT-SE 100 Dow Jones Industrial Average Percentage decrease 3.former Federal Reserve Board Chairman in his comments on December 5th. Italy. by 1999.INTRODUCTION: Irrational exuberance means wishful thinking on the part of investors that blinds us to the truth of our situation (definition based on the book of Yale professor Robert Shiller) or can be simply understood as the overvalue/undervalue of the market because of irrational thoughts. 1 IRRATIONAL EXUBERANT AND STOCK MARKET CRASH 1929 .3% These facts makes the words “irrational exuberance” quickly became Greenspan’s most famous quote—a catch phrase for everyone who follows the market. However. The word irrational and exuberance themselves are not new. more than tripling in five years. Singapore. What interest me is that after Mr. the market did actually react according to what is called irrational exuberance. actually the economy situation between 1994-1999 was very splendid. 1996.
we have credence evidences to believe that sometimes. As we all know. to do all these functions.Therefore. the whole market movement is just the surface of a more sophisticated problem. Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even. graph or curve to explain issues for example. that the movement is just fakely. and managing risk. Woman can escape the small kitchen spaces and integrate with the fast-developed society outside. As we all know economics is the study of allocating scare resources.a combination between psychology and economics. That is why I choose the topic Irrational Exuberance. That is why we need behavioral economics. I want to explain the economic events (especially the 1929 stock market crash) without much using calculators or the graphs. we cannot merely use mathematics functions. or say. Richard M. the economists need to understand the trend reaction of the majority of the market. THE STOCK MARKET CRASH: 1929 has gone into the history of USA and the world as the time of the most devasting crash in the history. the same as why increase tax rate will reduce the tax revenue of the government and they even cannot give explanation to the failure of Hope Scholarship initiated by Bill Clinton in 1992 (the asymmetric information problem). I want to look deeper into the underlying forces that make the market move around II. In some situation. It was also the beginning of The Great Depression on the whole world. these mentioned-above tool cannot explain neither why a student choose to go to university and waste a huge amount of money. The rich 2 IRRATIONAL EXUBERANT AND STOCK MARKET CRASH 1929 . This was the era of freedom and abolishment of irrelevant moral. Salsman. forecasting market movement. at the end of World War I raise the curtain for new era of the USA. instead of working right after graduating from high school (a matter of opportunity cost) nor can they explain why increasing welfare for the poor will reduce the productivity of the whole economy and can reduce the welfare in reality of the whole society.created because of irrational decisions from a mass of investors. I want to explain them through psychological aspects. However.
1 and 2012 July CPI: 229. This record growth lured people to go to the stock exchange. Stock prices then went up and down throughout 1925 and 1926. The 3 IRRATIONAL EXUBERANT AND STOCK MARKET CRASH 1929 . followed by a strong upward trend in 1927.confidently took money out of the bank and the mattresses to invest in the marketespecially the stock market. Although stock market has had the reputation of riskiness. the exuberance in the community made people to believe that stock was safe assets and whatever happened they could get their return back. Below is the graph of the USA GDP through 1920-1940. This was such a promising and splendid value for the future economy.104). The first noticeable upward trend was in 1925.and the peak was in 1929-above 800 billions of constant 1999. and of course as demand increase the price will also increase.more than 9918 billions in today’s value (with 1929 CPI: 17. More people rush to the stock market. It shows the upward trending of gross domestic product between 1920-1929.
" which means that the buyer must come up with the cash to pay back his loan immediately. Stock market became a place for dream comes true. And of course. brokers were lending small investors more than two-thirds of the face value of the stocks they were buying.an unsustainable increase in prices brought on by investors’ buying behavior rather than by IRRATIONAL EXUBERANT AND STOCK MARKET CRASH 1929 4 . The solution was “all margin”. the buyer only had to put down 10 to 20 percent of his own money and thus borrowed 80 to 90 percent of the cost of the stock. it was. the broker would likely issue a "margin call. By August 1929. If your neighbor could earn more money by investing in the stock market why didn’t you do so? If anyone asks me what is the most popular things in 1920s? I will not hesitate to reply that it was the stock tick.S. And by 1928. That is where the problem begins. people could found an article with a lucrative name "Everybody Ought to be Rich" by Samuel Crowther suggested that every American could become wealthy by investing $15 per month in common stocks (at a time when average American's weekly salary was between $17 to $22). a stock market boom had begun. at the time.a very high leverage. Buying on margin could be very risky. On Ladies Home Journal. but the rest he would borrow from a broker. Over $8. Year 1922–1924 1925–1928 1929–1932 Number of article 29 articles 67 articles 182 articles What was mentioned in the newspaper at that time: the story of a chauffeur. If the price of stock fell lower than the loan amount. Meaning that the buyer would put down some of his own money. The number of news about stock market increased day by day.strong bull market enticed even more people to invest. Everybody wanted to buy stocks but not all of them had enough money. we can called the stock market a speculative bubble. People believed that stocks could change their life and make them richer. And from now on. more than the entire amount of currency circulating in the U. Was it attractive? The history has given us an answer: Yes.5 billion was out on loan. They are so pervasive. In the 1920s. the media also played an important role in propagating this exuberance. a teacher a famer became a millionaire in one night.
The strategy seemed to work. 5 IRRATIONAL EXUBERANT AND STOCK MARKET CRASH 1929 The burst of the bubble was marked on Black Thursday October 24th the market lost 11% of its value at the opening bell on very heavy trading. On October 29th. reaching 381. fundamental information about value. the actual tsunami would come. Steel at a price well above the current market. and the Dow lost an additional 30 points. when the bubble burst.the second highest of all time (as we can see from the graph below). but recovered substantially before the end of trading. they were trying their best to save the market. investors tried to sell and get rid of their stocks. with little or no cause in the country’s general situation. economist Irving Fisher one of the earliest American neoclassical economists famously proclaimed. actually there were not enough profit to share among so many people. All of the increase in prices is just an illusion. The peak of the bubble is on September 3th.genuine. And what the media said about the first depression.” And on New York Times “The market smash has been caused by technical rather than fundamental considerations. so that the closing aver-age was down only 2. . or 12%. Finally. Shortly before the crash.” Yes. the market stopped being panic.” On Chicago Tribune “It has been the collapse of a vastly inflated bubble of speculation. about 16 million shares were traded. on Wall Street Journal it was “Everybody in responsible positions says that business conditions are sound. if they could not again establish the credibility among investors. The recovery bore remembrance to a group of leading Wall Street bankers.17.S.1% from the preceding close. A top-heavy structure has collapsed of its own weight—there has been no earthquake. 1929 “Black Tuesday”. who placed a bid to purchase a large block of shares in U. the economy cannot satisfy hundreds of millionaire at one time. you cannot stop it. "Stock prices have reached what looks like a permanently high plateau. 1929 with the Dow Jones increase in value fivefold.
the stock market suffered a mini-crash. banker Charles Mitchell made an announcement that his bank would keep lending. major crash (for example Roger Babson). his reassurance stopped the panic By the spring of 1929.07 Many investors lost all of their fortune on this terrible event and claimed that everything come out of sudden that they could not control or found way to hedge. the market believes completely in the spectacular future which is drawn by the journalist and analysts. 1929. this means if people had used logical thought to analyze the market they could have saved themselves.73 230. steel production went down. or directly speaking what made the irrational exuberance: The first and easily seen is the role of media in exaggerating the value and the safeness of the stock market. There are some signs of troubles in the market. 1929 −38. they would not be accepted. revenue forced them to behave unethically. On March 25. house construction slowed. As the result. They were scared if they published something different or contrary to the market belief. 6 IRRATIONAL EXUBERANT AND STOCK MARKET CRASH 1929 - . the whole situation was because of irrational decisions and thoughts. But is it true that there are no signs at all. However. - III.64 −30. There were also a few reputable people warning of an impending. As I said from the beginning. fortunately. 1929 October 29. and car sales were stagnant.33 260. REASON: What made such a proliferation in the stock market and then led to a millennium decrease.57 −11.Dow Jones Industrial Average on Black Monday and Black Tuesday Date Change % Change −12.82 Close October 28.
Moreover. and the Louisiana national lottery itself was effectively shut down by an 1890 act of Congress prohibiting the sale of lottery tickets by mail. the government regulators created the Securities and Exchange Commission (SEC) to protect the stability of the market. Most forms of gambling and lotteries were outlawed by states in the 1870s after a scandal in the Louisiana lottery. That was why after the 1929 crash. Remember that it ought to be you to decide for yourself. Yes. we can see that “Irrational Exuberance” is not just a word from one celebrity. the seven Fisher Brothers. they may be not as lucrative as it seems. if too many people. Cutten…. However the market still trusted them because of their promising advertisement. there is high opportunity that it would crash terribly. but it is very hot and can bear the risk of becoming a flame. Mutual funds encourage more naïve investors to participate in the market. by leading them to think that the experts managing the funds will steer them away from loss. Fourth is the effect of overconfident investors such as John J. at first the stocks may be truly profitable. even the most credible ones rush to invest in some kind of portfolios or stocks. Those gamblers came to the market to bet their lucks and created a fake signal that the market as a whole was increasing rapidly. Therefore. Whenever the market is in its peak. If investors cannot separate between rational and irrational exuberance. Ponzi schemes. it is also a phenomenon of the market. one receives a certificate (the lottery ticket). it is not the responsibility of the market. LESSON FROM HISTORY The history has given us a very meaningful and useful lesson. sooner or later he will lose all of his money. many of them were dishonest operations and some of them even. effectively. Don’t build your castle in the air THANK YOU FOR READING 7 .and stocks market appeared to be a wonderful substitute. William Crapo Durant and Arthur W. IRRATIONAL EXUBERANT AND STOCK MARKET CRASH 1929 IV. so do not irrationally trust them.- - - Second is the proliferation of mutual funds. That means risk lovers could not satisfy their desire. That is the normal cycle of development. The 1920s bull market witnessed the establishment of many trust investment companies without the safeguards we associate with mutual funds today. Wall Street can be another Las Vegas: one deals with a computer. Third and also the most subtle reason I think is the gambling opportunities.Raskob. It was also a kind of gamble.
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