Nice little piece on the bubbliness of the art market recently. (Hat tip--er . . . one of the many blogs I read. It's been that kind of a morning). For some reason, it puts me strongly in mind of the book I've been reading: The Billionaire's Vinegar by Benjamin Wallace. Perhaps because both involve rich people spending outrageous sums of money on something that we proles will never get close to.
The book--which I highly recommend, as it's gripping--involves possibly the most elaborate hoax pulled before Bernie Madoff became a household name, the counterfeiting of bottles of old wine allegedly from Thomas Jefferson's Paris cellars. The way Wallace tells it, you can't help but notice the fraud--and wonder how everyone else didn't. One guy makes all of these amazing finds of hidden oenological gems, but no one wonders how come Christies or Sotheby's never managed to beat him to the punch? Why didn't people realize it was too good to be true?
Because success is self-reinforcing. If you believed the first eight amazing finds, the fact that Rodenstock had found the ninth actually made it more believable that the find was real. After all, it was Rodenstock.
It's easy, in hindsight, to see that we should have stuck with the tried-and-true wisdom; but there's a reason that evolution has trained people to overweight recent experience. If you didn't, you'd be in big trouble when the situation changed. And the situation did change. There were genuine hoardes of old wines found before the Rodenstock frauds by a few amazing wine conoisseurs who specialized in unearthing them; Broadbent of Christies was the genuine article.
Similarly, housing markets really did change, thanks to things like zoning and environmental regulations that dramatically slowed the pace and scope of new development on the coasts. Credit brokers really did get better at assessing credit risk. it's just that housing didn't get as difficult to build, or credit risk as easy to assess, as recent experience showed.
Because we overweight recent experience, we overshoot on the bubbles. But if we didn't overweight recent experience at all, it would take us 100 years to notice that FICO scores were pretty good--or that many treasured innovations in liberal governance hadn't actually caused society to implode.
Is there some way to make us weight only, always, the right things, to never go too far in rewriting what we know about the world? Somehow, I doubt it.