Bubble Logic

Everyone remembers the great bursting of the tech bubble, right? According to many, we are on the cusp of another great bubble burst--the Real Estate Market. Daniel Gross laid out the comparisons between tech and real estate recently in Slate and it's a hard argument to fault. Both bubbles feature a rapid rise and repeated false predictions of a market bottom. In fact, you can track the ludicrous attempts by realtors to deny the real estate market is crashing through an assortment of real estate bubble blogs like housingdoom.com. But, as much as I hope to be able to benefit from this particular bursting with the purchase of a cheap apartment, I'm not really interested in the Real Estate Bubble for it's own sake. I'm interested in the underlying logic of bubbles as a whole. What are they? How do they happen and can they be prevented?When you look at both the Tech and Real Estate bubbles they seem an awful lot like faulty self-replicating software programs, where market cheerleaders are rewarded and market pessimists are sidelined or driven out of business. There seems to be no built-in b.s.-detector at all and no reward for truthfulness.This got me thinking about the existence of bubbles elsewhere. Will there be an Energy Bubble as companies race to develop alternatives to ward off the impending disaster of Peak Oil? Are there non-economic bubbles? Once you start looking, you see bubbles everywhere. For the sake of clarity, I've come up with the following definition of a bubble:An institution or idea that expands itself regardless of its intrinsic merits.Here are some other examples:The Ethanol Bubble: Everybody's getting in on this game. Tax breaks and tariffs are being rearranged to support it here and abroad. And the phrase Ethanol Bubble is already Googlable. Here's a Business Week article on the subject. Why should we worry? In addition to the usual financial reasons to fear bursting bubbles, ethanol carries other hazards. Ethanol requires the conversion of food farms to fuel farms and/or a total increase in the overall acreage of farmland. Farms are devastating to the environment. To generate the quantity of ethanol needed to replace oil would require scarring our already battered planet with too much farmland.The War Bubble: First you invade Afghanistan, then you dummy up some phony reasons to invade Iraq. When the quagmire you've created there lures neighboring Iran into the picture (or when you can claim that this is the case with or without any evidence), you lay the groundwork for invading Iran. And so on and so on. War pessimists are marginalized. War cheerleaders are promoted. Thankfully, the American public seems to have developed a powerful distaste for unwinnable wars and may be able to stop this meme from runaway replication, but don't rest easy.The Organized Religion Bubble: When it comes non-meritorious self-replicating memes, you can't beat organized religion. Wrong on every attempt to explain reality, oppressive, sexist, homophobic, hypocritical, violent and just plain bone stupid and yet you can't swing a dead cat anywhere in the world without hitting a church. Why? Excellent replication. You promise people eternal life; you establish a monopoly on births, deaths, and marriages; and you make it a "sin" to question their authority. Genius. In fact, organized religion is the all-time heavyweight world champeen of meme replication. How else to explain the millenia-long success of a pre-scientific worldview.But there are good bubbles too:Philanthroprizes: Unlike regular philanthropy, a philanthroprize (my term) offers a cash award to the person or group who achieves a specific goal. In 2004, for example, ten million dollars went to SpaceShipOne courtesy of the X Prize for the first private space flight. Awarding a prize for the achievement of a specific goal incentivizes others to spend money in the hope of winning the prize. As X Prize creator Peter Diamandis explained in The Economist recently, offering a prize means "ten to 40 times the amount of money gets spent.” Talk about philanthropic efficiency. Why is this a bubble? Because it's catching on. Especially now that Google co-founder Larry Page is helping to raise money for the X-Prize. Such an efficient bottom-line approach to philanthropy will undoubtedly attract hard-nosed business types who want maximum yield for their philanthropy dollar. As the success of philanthroprizes spreads, more will donate. This whole meta approach to charity is like a runaway philanthropy machine.The Interweb: The linkable get linked while the unlinkable languish in obscurity. This is the very definition of runaway replication and it's built in to the internal logic of the Web itself. Brilliant. As brilliant as the religion meme? Perhaps.But do philanthroprizes and the Interweb satisfy my original definition of a bubble? One could argue that they are both replicating because they are good ideas. I think not. Undoubtedly they are both good ideas, but their success has less to do with their merits than with the efficiency of their built-in replication strategies.Which is why, when it comes to bubbles, wherever they may be, you can never assume that success equals merit. Success only equals success. Merit is something else entirely.