Financial Democratization and Fools = Bubbles

I often read the essays of Owen Lamont, a portfolio manager at Acadian Asset Management, a Boston-based global, systematic asset manager. After reading and translating his latest piece, “THERE ARE IDIOTS: Seven pillars of market bubbles”, I set out to explore how the superficial “democratization of finance” resembles “irresponsible pleasure.”

It feels as though we are in the middle of a ferocious Bitcoin bubble right now.

The stock market—at least the segment made up of meme stocks and crypto-related companies—is close behind. How should we understand the origins of this speculative frenzy? The seven time-tested phrases introduced below offer some clues.

Bubbles are typically accompanied by irrational optimists. In theory, a bubble could form without “fools,” but in reality bubbles explode in size when swarms of ignorant, numerically inept, get-rich-quick “uninformed” investors (“idiots”) pile in. “There are idiots. Look around.”

These are the first two lines of a legendary (but unpublished) paper by Larry Summers, and they encapsulate the entire short piece. With just five words, it presents the hypothesis “There are idiots” (undeniable) and the evidence “Look around” (irrefutable). It is said that only a tiny handful of people have actually seen the paper (there’s even a joke that you need to be a “seventh-level Thetan” to read it). It became more widely known after Richard Thaler (2015) mentioned it. The real debate begins over whether these “idiots” affect price formation in financial markets. Looking at today’s environment, the behavioral-finance view—that idiots shake markets—feels increasingly persuasive to me.

This was the title of an article by John J. Raskob published in August 1929 in Ladies’ Home Journal. In it, he passionately urged Americans to invest in stocks.

Of course, stock investing itself is not a bad thing, but urging people in 1929 to buy overvalued, leveraged closed-end funds was atrocious timing. When the Great Depression hit in the 1930s, “instead of everybody becoming rich, most people became poor.” Bubbles often feature a “utopian future of endless prosperity.” Raskob can be seen as part of a long tradition of selling wildly overpriced assets to the masses under the banner of “democratizing finance,” like a game of hot potato.

In the film industry, William Goldman’s famous line is often quoted: “Nobody knows anything” about future box-office success; in the end it is all just an educated guess (Goldman, 2012). The same applies on Wall Street. In truth, no one knows for sure which asset will go up or down. Many of our theories also assume that asset prices are inherently unpredictable. The implication of “nobody knows anything” is that anyone who speaks with certainty about the future is likely a charlatan. Charlatans come in many forms: analysts issuing hyped-up recommendations, influencers boasting on social media, CEOs who pretend to be omnipotent, and so on. These days, crypto “charlatans” have proliferated and are spilling over into the stock market as well. John Kenneth Galbraith (1994) writes:

This leads to the question: “Why are people so full of confidence when they are too ignorant to recognize that financial-market outcomes are fundamentally uncertain?” (Dunning, 2011). And why does the public end up listening to these supremely confident charlatans? Take the question, “Will Bitcoin go up next year?”:

Who sounds more confident, and who seems to be offering concrete marching orders? In reality, nobody truly knows, yet it is the charlatan who pretends to know everything who captures attention.

This famous line, often attributed to Churchill or Truman, aptly describes the “Bitcoin maximalists” driving today’s Bitcoin mania. They firmly believe Bitcoin is the key to solving all the world’s problems and will preach its virtues for hours on end. According to Pedersen (2022), such fanatical optimists play a central role in creating overpricing. They relentlessly spread optimism and act as “influencers” or “thought leaders” on social media and online communities. In 2022, the crypto market, including Bitcoin, at one point crashed to the point of being declared “almost dead.” Yet Bitcoin maximalists neither changed their minds nor stopped talking. Their upbeat message keeps spreading to the public, like “Typhoid Mary” transmitting disease.

Even simple questions like “What’s so great about crypto?” or “What is Bitcoin actually used for?” seem to have different answers every year. Because there is no crisp definition, its enigmatic “mathematical mystique” makes it harder for people to argue against its value. Real-world Ponzi schemes also often exploit complexity and obscurity by design. According to Chancellor (2000), a swindler behind the 1720 South Sea Bubble is said to have remarked as follows.

In 1960, Jack Dreyfus said this, half in jest and half in earnest.[1]

Today, Bitcoin is exactly that kind of “furth-burner.” The fact that nobody really knows what it is only makes people more fascinated by it.

This phrase sums up one of the core dynamics of financial markets. “Number go up” captures trend-following psychology, FOMO, and what I have previously called the “Iron Law of Return-Chasing Flows.” People pile into assets that have performed well in the past. Zeke Faux’s book Number Go Up (2023) vividly chronicles the rise and fall of cryptocurrencies. But with Bitcoin prices running hot again these days, his next book might well be titled Number Go Up Again.

Sir John Templeton once said the following.

Of course, market conditions are always a little different. No market is ever exactly the same as in the past. But real wisdom comes from being able to distinguish “fundamentally similar patterns” from “minor differences at the margins.”

Charles Mackay, in Extraordinary Popular Delusions and the Madness of Crowds (1841), exposed various historical bubbles, yet he himself got swept up in the British railway mania of 1845, bought shares, and even at the peak insisted it was not a bubble (see Harford, 2023). At the time, Mackay said this.

Translation: “This time is different.”

[1] Some sources quote this anecdote in several different versions.

The reason I don’t invest in coins is that (1) they lack cash flows that could serve as a basis for value, and (2) I don’t clearly understand what benefit they provide to human society. So if someone put a gun to my head and forced me to invest in a coin, I would choose Bitcoin. If all coin projects are ultimately scams (which is what I believe), then it is rational to pick the biggest and most ambitious one. For reference, I see coin “trading” as a completely different realm from investing.

In the United States, services like Robinhood, and in Korea, services like Toss, have come up with a solution to the problems of finance: they claim to “democratize” access to financial products through convenient UX. Let’s take a look at the definition given on Wikipedia.

For a long time, I have argued that finance can function properly only when a certain level of opacity and uncertainty coexist. In the U.S. economics blog interfluidity, in a post titled “Why is finance so complex?”, the author writes as follows.

However, this assumes the old, bank-centered financial environment. Today, thanks to the active sharing of information from often unclear sources and the proliferation of mobile-based financial platforms, it has become easier than ever for retail investors to invest directly in financial products. What we need to ask here is this: Has dramatically improving access to finance really enhanced consumer welfare?

If there is one clear lesson from the various experiments with small and mid-sized real estate project financing products, P2P lending products, and crowdfunding, it is this: ordinary financial consumers are remarkably foolish. They are poor at distinguishing good projects from bad ones, and therefore are highly likely to pour excessive liquidity into projects that merely look attractive on the surface (but are not in reality). To borrow the industry’s standard term, they are “suckers.”

Blindly improving access without providing accurate information and a clear explanation of the risks does not amount to the democratization of finance. If anything, it is closer to a form of “irresponsible pleasure” that encourages financial firms to churn out junk financial products at will. For that reason, we do not agree with the claim that Toss—or any other platform, for that matter—has truly innovated finance.