Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity—or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.
Economist Robert Shiller argues that a worldwide “social epidemic” of ideas is driving renewed confidence in the economy, just as it drove the crisis of confidence that seems to have bottomed in March:
Economic analysts often turn to indicators like employment, housing starts or retail sales as causes of a recovery, when in fact they are merely symptoms. For a fuller explanation, look beyond the traditional economic links and think of the world economy as driven by social epidemics, contagion of ideas and huge feedback loops that gradually change world views. These social epidemics can travel as swiftly as swine flu: both spread from person to person and can reach every corner of the world in short order.