Quote from: John Smith on July 08, 2011, 10:58:47 AM

Quote from: hugolp on July 08, 2011, 10:16:20 AM

A bubble is not trial and error, its not a discovery process. Its reactions to bad signals, and that is why the trial and error is not called malinvestment (you are getting information), but a lot of the results of the bubbles are indeed malinvestments, and could have been avoided if the price signals would not have been distorted.

Whether pricing signals are "distorted" is really subjective, as pricing might depend on estimates on information that is not known by anyone yet at the time of the investment such as rate of social adoption, political factors, scientific discoveries, and so on. I don't think there is such a thing as undistorted pricing signals as all. The world is a very uncertain place.

The common definition everybody uses for "distorted signals" is signals produced not by voluntary exchanges but by force. That is the definition I was using.

With that definition the signals are distorted and that produces bubbles. But I hope you at least have noticed that trial and error process is different from a bubble, because during a bubble the cluster of errors of the entrepreneurs get concentrated in one way only, while in a trial an error process they are everywhere. Noticing this should lead you to understand why the bubbles form: Why do entrepreneurs suddenly make all the mistakes in the same direction while the market process produces mistakes in very different areas and in very different ways due to people trying things and sometimes failing?