“The Optimistic Thought Experiment”, 2008-01-28 (; backlinks; similar):
[An interesting thought experiment to assess what must happen for an “optimistic” version of the future to unfold, and the possibility of an impending apocalypse and how that might lead to financial bubbles. The article is eye opening, depressing and fascinating. Peter argues that science in all of its form (nuclear weapons, biological catastrophes, etc) has vastly increased the probability of some form of apocalypse; betting on the apocalypse makes no sense so rational investors don’t do it; globalization is the anti-apocalypse bet; financial bubbles are bets on globalization; and the recent slate of financial bubbles, which he calls unprecedented in history, are related to the growing sense of impending doom.]
One would not have thought it possible for the internet bubble of the late 1990s, the greatest boom in the history of the world, to be replaced within 5 years by a real estate bubble of even greater magnitude and worse stupidity. Under more normal circumstances, one would not have thought that the same mistake could happen twice in the lifetimes of the people involved…
The most straightforward explanation begins with the view that all of these bubbles are not truly separate, but instead represent different facets of a single Great Boom of unprecedented size and duration. As with the earlier bubbles of the modern age, the Great Boom has been based on a similar story of globalization, told and retold in different ways—and so we have seen a rotating series of local booms and bubbles as investors price a globally unified world through the prism of different markets.
Nevertheless, this Great Boom is also very different from all previous bubbles. This time around, globalization either will succeed and humanity will achieve a degree of freedom and prosperity that can scarcely be imagined, or globalization will fail and capitalism or even humanity itself may come to an end. The real alternative to good globalization is world war. And because of the nature of today’s technology, such a war would be apocalyptic in the 21st century. Because there is not much time left, the Great Boom, taken as a whole, either is not a bubble at all, or it is the final and greatest bubble in history…there is no good scenario for the world in which China fails.
…But because we do not know how our story of globalization will end, we do not yet know which it is. Let us return to our thought experiment. Let us assume that, in the event of successful globalization, a given business would be worth $100/share, but that there is only an intermediate chance (say 1:10) of successful globalization. The other case is too terrible to consider. Theoretically, the share should be worth $10, but in every world where investors survive, it will be worth $100. Would it make sense to pay more than $10, and indeed any price up to $100? Whether in hope or desperation, the perceived lack of alternatives may push valuations to much greater extremes than in non-apocalyptic times.
View HTML: