Economics

Abstract

Abstract The irrational exuberance of people in an economic bubble can be contrasted with the panicked despair of people in a crash by identifying their very different concepts, beliefs, rules, analogies, and emotions. Motivated inference encourages people to think that good times can only continue, whereas fear-driven inference disposes people to dread that bad times will only get worse. In bubbles, motivated inference and molecules such as testosterone and dopamine provide the feedback loop to encourage individuals to remain optimistic. In crashes, fear driven-inference and molecules such as cortisol promote pessimism. Bubbles, crashes, and other economic changes are not just matters of individual psychology because they are also social processes resulting from the communicative interactions of many people.

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