Greed Does Not Drive Financial Bubbles – Envy Does

One of my first articles took a look at how financial bubbles are formed. Although not all financial bubbles will follow this form exactly, as a general rule of thumb, we should still be able to see similar patterns each time the market froths up badly.

Here’s a chart depicting the various phases of a typical financial bubble:

Rodrigue Bubble Graph

However, I realised recently that in the mania phase, many investors like to use the term “greed has taken over.” This implies that it is greed that cause most financial bubbles. I think there’s more to the matter.

In the dictionary, greed is defined as “an excessive desire, especially for wealth or possessions.” Yet psychologically, it’s hard to see investors buy into a bubble just because they have seen a chart showing stocks going up.

In fact, the reason why – in my opinion – most of us have the urge to buy into a financial bubble is because we keep hearing and seeing stories about others who have speculated and come out richer. This means that envy might actually be the cause of financial bubbles.

Envy is explained in the dictionary as “a feeling of discontent or covetousness with regard to another person’s advantages, success or possessions.” The difference between greed and envy is that the former suggests investors will join a bubble situation just because the trend shows that there is money to be made in a trade. Yet investors may be investing in bubbly times because envy had kicked in when we see someone else enjoying the wealth that we also covet. This in turn drives us to copy that person’s actions in an attempt to have what he has.

A clearer way to differentiate

Although we should not base our investment decisions solely on how greedy or envious the market is, an understanding of the subtle differences between the two might help us better identify if we are in a financial bubble or not at any point in time.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.