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Schiller’s List: How to Diagnose the Next Bubble

Robert J. Shiller, the Nobel-prize winning Yale economist, suggested Wednesday — a bit whimsically — that bubbles could be diagnosed using the same methodology psychologists use to diagnose mental illness.

After all, a bubble is a form of psychological malfunction. And like mental illness there’s a tricky gray area between being really sick and just having a few problems, Schiller said during a panel discussion at the World Economic Forum in Davos, Switzerland.

The solution: a checklist like psychologists use to determine if someone is suffering from, say, depression. So here is Schiller’s checklist:

  • Sharp increases in the price of an asset such as real estate or dot-com shares
  • Great public excitement about said increases
  • An accompanying media frenzy
  • Stories of people earning a lot of money, causing envy among people who aren’t
  • Growing interest in the asset class among the general public
  • “New era” theories to justify unprecedented price increases
  • A decline in lending standards

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