so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of other competitors, all of whom are looking at the problem from the same point of view.”
not everyone in the stock market is playing this game. Some people—think of Warren Buffett—are acting independently, simply picking the prettiest girl (that is, the stocks of the best companies), believing that eventually the market will, as it were, pick the prettiest girls, too. Others are picking girls they think are pretty but that other investors seem likely to find fetching as well. And some investors are doing only what Keynes recommended. Most of the time, then, the stock market is an ever-changing but relatively stable mix of independent and dependent decision making.
Bubbles and crashes occur when the mix shifts too far in the direction of dependence.
investors interpreted the rising prices of AMF and Brunswick as evidence that everyone thought bowling was truly the next big thing. Because everyone seemed to love the bowling stocks, investors wanted to own them, which in turn only made the stocks seem all the more attractive. Buying AMF seemed like a no-lose proposition, because there would always be someone else who’d be willing to take the shares off your hands. And as the stocks kept going up, the incentive to do some independent analysis—the kind that would have led people to be skeptical of the whole bowling boom—diminished. As a...