The lunatic factor

"The third risk is just as significant as the other two, perhaps more so. It is the risk associated with what I call the lunatic factor. Years of experience have taught me to ask, upon seeing what looks like a market mistake, whether the lunatics have taken over the asylum. It is important never to underestimate the buying or selling power of a crowd of market lunatics who are acting under the influence of some financial delusion or emotion, whether greed or (more commonly) fear. When the lunatics take over the market asylum, any market mistake can and probably will get a lot worse before it is corrected. In such a situation, rational calculation of underlying economic factors must yield to attempts to outguess the thinking processes and behavior of the lunatics. In such circumstances the market price can be nearly indeterminate, and the risks inherent in attempting to correct market mistakes are inordinately high."

The lunatic factor