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Fragility of Self-fulfilling Prophecies

We learn by copying.

A baby learns to talk by listening to their parents and trying to emulate their tone and the sounds they make.

Even in our adulthood, we often judge our success by comparing ourselves to our peers. What we watch, what we read, what we listen to, all depend to some extent on our family members or our friends.

It's no wonder that's hows bubbles form in markets. People buy certain stocks, gold, or houses, not only due to their value, but also due to simple herd behavior.

And it works, some of the time. That's how asset values sometimes balloon out of proportions.

But these inflations are very sensitive to outside shocks. Once the spell is broken, everyone joins a mad stampede to get out and the prices of the assets drop like a rock. This happened to the price of houses in 2008 (in the US) and the price to gold in 2011.

The implication for us is to lead our lives according to predetermined principles, and minimize following our peers all the time. Otherwise we risk buying high and selling low.

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