Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin

The comments above & below is an edited and abridged synopsis of an article by John Hussman

Delusions are viewed as a deficiency in reasoning ability, but the risk of thinking this way is that it encourages the belief that logical, intelligent people can't be deluded. The history of financial markets suggests a different view. In a booming market, there is a natural tendency to look for explanations. The problem isn't that logic and reason have failed, but that the inputs have been distorted, and in an attempt to justify the advance amid the speculative excitement, careful data-gathering is replaced by a tendency to confuse temporary factors for fundamental underpinnings.

While psychological delusions are different from financial ones, a similar principle is suggested by psychological research. Delusions are best understood not as deficiencies in logic, but rather as explanations that have been logically reached on the basis of distorted inputs.

The reason that delusions are so hard to fight with logic is that they are established through the exercise of logic. Responsibility for delusions is more likely to be found in distorted perception or inadequate information. The problem isn't disturbed reasoning, but distorted or inadequate inputs that the eyes, ears and mind perceive as undeniably real.

Hussman examines the anatomy of speculative bubbles, and then discusses three popular delusions that have taken hold of the crowd and the premises that drive them: the delusion of paper wealth, the delusion of a booming economy, and the delusion that is Bitcoin.