To start with, how can an observer distinguish a boom and a bubble, especially since most booms overshoot and collapse much as all bubbles do? When exactly do the prices go from high, in anticipation of increased yield, to outrageous, clearly beyond any reasonable prospect? Isaac Newton got hooked on the South Sea Bubble. He actually bailed, having made a fair bit of money, but then got in again and got creamed along with everyone else. He was supposed to be some kind of genius, and with his position at the mint, clearly an insider.

To be honest, I have my own theory. If you consider every investment opportunity as a simple Ponzi scheme, the only thing that matters is getting out before the scheme runs out of suckers. It is easy out here in the sticks, we have a local billboard that is used to indicate that the big guys are running out of suckers, and are even interested in whatever slim pickings they can find out here. I could tell the tech boom had passed when the sign started to tout investing in the stock market, and I could tell the real estate boom had passed when the sign started to tout investing in real estate. Is this all there is to it? Just drive around some poor, rural county and check the billboards? There has to me to all this investing and economics stuff.

I really don’t think bubbles have to do with a lack of logic. It actually is possible to make money in the stock market or real estate. When one sees prices rising, and rising, and rising, it makes sense to join in the party. That is not irrational at all. College graduates make more money than high school graduates who make more money than drop outs. Is this real logic or just bubble logic? Which way are you going to argue with your kid? Of course, it helps to keep track of the music when the party game happens to be musical chairs.

I’m still skeptical. I graduated — as an engineer, as luck would have it — in 1974, into the effects of the 1973 Arab Oil Embargo on GM. I was one of two engineers in the department I was working in with less than 20 years seniority. That was a backup employment position, as the research department I had been aiming at winked out of existence and was folded into the rest of the general engineering staff of that division of GM. I do have some actual experience regarding starting a career in less-than-optimal circumstances.

So I transferred into the IT organization, and made a career there. Despite having graduated into less-than-optimal economic times (the Nixon insane (perhaps I have those words reversed) wage-and-price controls was soon to follow), I saw my salary rise in accord with the trend suggested by the author of the article you offered. I never, however, saw a year of salary decline anytime within the initial decade of employment, despite having started during what was (up until now) the “worst recession since the Great Depression”. As the author states, “luck matters”. And while toward the end of my career (I retired early at 54), new hires were getting much larger compensation packages than I did when I was starting out, when you inflation-adjust those packages, it was not so different. But that’s only a single data point.

Like I said, I’d have to see the details behind the study. The mere fact that someone ran a study and “demonstrated” result XYZ proves very little, as the medical establishment manages to produce conflicting studies with frightening regularity. And in the realm of economics, failed theories are a dime a dozen, with government studies being among the most suspect of all. Studies must stand the test of time and have their conclusions challenged many times before they should be taken with other than a grain of salt. They’re better than unsubstantiated opinion, but until they have withstood several challenges, not much better, IMHO.

Another way of examining the question of “retired wealth” is to examine the savings and spending habits engendered by having started out in tough times, vs starting one’s career in the middle of the 1990’s, for instance, perhaps at a fledgling dot-com company. Those folks started at the top, and I suspect are now a significant step lower than where they were when they started out. If their spending and savings habits stuck with them from their days of “bilk and money”, then they are most assuredly poorer today.

There’s more to acquiring wealth than salary. The NBER study (at least as described in the linked page) apparently only examined income data, not asset accumulation, of only Canadian graduates over a single period precisely covering the years from 1982-1995 (or 1976-1999, if you want to include non-overlapping areas of coverage from their data sources). If would have been a lot stronger study if the entirety of the 20th century had been examined, and a larger population of subjects had been studied. Certainly more than one or two boom and bust periods. And the biggest item missed (and I admit that I see no good way to collect this data) is their net worth at retirement.

I remain skeptical.

I believe that e person is a slave to his/her genetics, environment and past experiences. I tend to believe that when an accident happens or a crime is committed, the outcome could not have been any different unless many of the a priori variables had been different: the environment, physiology, past experiences…

Because we humans think we have free will, we’d like to think that the crime could have been averted and that the criminal really had a choice at the moment of the crime. We also like to believe in justice when we have been wronged and that probably reinforces our belief in free will.

I think our societies are based on faulty systems, entirely based on the existence of free will. In the middle ages, they used to put animals on the stand, so obvioulsy our logic has been changing throughout the centuries and will continue to change as we find out more about the brain.

If free will is a farce, then our legal system would need to be totally transformed. We would need to revisit the difference between crime and accident for one. It would give a new meaning to being proactive. You would have to weed out the genes, the environmental factors and experiences that promote undesirable actions. Obviously, we are not advanced enough technologically and in our knowledge of the brain to do this. And because of this, it feels much more comfortable to hold on to our notion of free will. It’s so much easier to say that he/she did it. It’s her/his fault. It suits our current level of knowledge and our inherent desire for simplicity and justice.

But even without being “responsible”, it does not negate the fact a crime was committed and that a person can still be deemed a menace and need to be restrained.

Rational expectations was one of the approaches a few decades back as well. If I’m not mistaken there have been some Nobel Prizes awarded for showing the “irrational economic behavior” in a seemingly rational world.

Where’s MEH? He could probably cite chapter and verse various mysterious programs investigating mind control.

And there have been some really good recent articles about the boundary between conscious and subconscious.

Here’s a question. Suppose the government is spending tons of money investigating the neuroscience of how emotion, reason, instinct,impulse define behavior and decisions.

Will that ultimately be applied toward stimulating consumption/good citizenship, being able to monitor for early signs of non-compliance and take early corrective action, or further enabling individuals to improve their decision making processes?

We need to understand the science of this, but not use it to let ourselves off the hook for being stupid and greedy. Tricky balance to that, no doubt.

Is it the soundness of the decision or is it the fact that you rationalize before making a decision.

Garbage in, garbage out. What if you are rationalizing using a bad aset of data?

A large part of our decsion making is not even made consciously anyway. Secondly, the world is complex and our brains are selective so it is impossible to have the perfect data when making life decisions.

For example, who is author Gary Stix? Usually the articles carry brief bios of the authors. So and so is a professor of … at … There was no mention of who Gary Stix was. If you Google Gary Stix, you will find out. More interestingly, you will also get a list of his contributions to the magazine.

I found the article manipulative and insulting. It effectively puts the blame for the housing bubble squarely on the shoulders of the homebuyer. Sure, they ate the propaganda they were fed and bought into the market. Who could stay out when the terms were so favorable? Is that irrational?

The other side of the coin is behavioral economics, at its core, is really meant to be manipulative. Much akin to George Lakof’s work for the Democratic Party.

The work of Kahnemann and Tversky has been around for decades. Nothing new there. It’s a huge logical leap between their work, the recent neuroscience study of brain activity, and the conclusion that the housing bubble was simply the manifestation of our impulsive buyer side.

Would love to see more on this topic BR.

http://www.nber.org/digest/nov06/w12159.html

I’m looking for it. I’ve seen it mentioned a couple of times over the last decade but can’t remember who produced it. And I probably have to replace the “strongest predictor” with “important predictor”.

What I remember reading was that when graduates enter the work force in a recession they get lower wages than those entering in a boom. And by the time they reach 30, many of those salaries still don’t match those of the new entrants salaries despite increases. That difference makes a huge difference over an entire career.

For example, in the early 90s, engineers were starting around 30K. By the end of the 90s the new starting engineers were starting with 60K while the 30 year olds were probably just starting to touch 60K at 30.