If today many investors have decided to put their savings under the mattress, others are comforted by assurances by economists that what has happened since the decline of stock prices in August is a mere ''correction'' of an overheated market. Armies of financial advisers and analysts argue that the market obeys rational economic rules and can, therefore, be outsmarted. The stock market,'' he says, ''is clearly driven by irrational herd mentality and mass psychology. Speculative binges cause stocks to surge to price levels way beyond their economic value in terms of future earnings potential. Panics cause the equally irrational effect in the opposite direction.
History demonstrates the folly of building a huge edifice of credit on slender foundations.
He said that investors ''go mad in herds and recover their senses slowly.'' In the 17th century, for example, the Dutch went crazy over tulip bulbs. A single rare specimen could represent a lifetime's savings. Yet the market evaporated as quickly as it had appeared and, Mackay wrote, ''hundreds who, a few months previously, had begun to doubt that there was such a thing as poverty in the land, suddenly found themselves the possessors of a few bulbs, which nobody would buy.'' That lesson was quickly forgotten. In the early 18th century, a Scottish adventurer, gambler and convicted murderer called John Law became head of the Royal Bank of France by selling bonds pegged to an ambitious, but fictitious scheme to exploit French territory along the Mississippi. It worked for a while as people stampeded for the Mississippi bonds, but the scheme fell apart when they tried to withdraw funds.