Why do financial markets go from euphoria to depression?
Valuation in financial markets is never normal: it is alternatively very high or very low; phases of excessive pessimism follow phases of excessive optimism . This feature of financial markets destabilises real economies and may lead to a decline in demand for risky financial assets. How can this behaviour be explained ? T he most likely is explanation is herd behaviour. For example, each asset manager has its market share that depends on its performance relative to that of other ma nagers, and not its absolute performance. It is therefore given an incentive to behave like other managers and not according to the fundamentals, which would be too dangerous in the event of anticipation errors in terms of the fundamentals. The consequence is therefore excessive variability of asset prices and repeated crises in financial asset markets. To avoid this situation , the assessment period for asset managers’ performance must be significantly extended.