In Robert Shiller’s case for the continued decline of home prices in the U.S., he makes the following statement:
“Steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.”
People don’t change their views about asset values all at once, as believed by the efficient market types. There is a cascading effect that leads to long term trends.
Now if there were just a way to identify those long-term trends…:)
