Career Risk, Herd Behavior, and Bubbles

Reprint of a recent missive by smart cookie Jeremy Grantham entitled 'Pavlov's Bulls.' Grantham proposes that markets are not efficient in part because of career risk.

Career risk is potential for losing one's job as a money manager--which Grantham proposes is more likely to occur when you perform worse than other money managers. Career risk causes managers to follow the behavior of other money managers in herd-like fashion. Herding leads to excursions away from fair market value in the form of persistent uptrends and downtrends.

Grantham thinks that this mindless herding, when combined with access to easy money/credit, helps explain why financial market bubbles occur. Grantham has obviously studied historical market bubbles extensively, and he shares some of the findings from his studies.

Interesting thought food...