NEW HAVEN, Conn. — Since hitting bottom in early March, the world's major stock markets have all risen dramatically. Some, notably in China and Brazil, reached lows last fall and again in March, before rebounding sharply, with Brazil's Bovespa up 75 percent in May compared to late October 2008, and the Shanghai Composite up 54 percent in roughly the same period. The stock market news just about everywhere has been very good since March.
Does this suggest that the world economic crisis is coming to an end? Could it be that everyone becomes optimistic again at the same time, bringing a quick end to all our problems?
During a boom, people considering getting into asset markets weigh the fear of regret if they don't against the pain of possible loss if they do. There is no authoritative answer about what the "right" decision is, and no consensus among experts about the proper level of exposure to these markets. Should it be 30 percent stocks and 70 percent in housing? Or the reverse? Who knows?
So the ultimate human decision must be based on the relative salience of these discordant emotional factors. In a boom environment, the emotional factors are biased toward getting into the market.
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