Robert Shiller’s point, in the new edition of Irrational Exuberance, about the lack of attention paid to the warning signals of bubbles, has been preoccupying me. The attention problem was the theme of a conference at the Toulouse School of Economics a couple of years ago, as well as books like [amazon_link id=”000731731X” target=”_blank” ]The Invisible Gorilla[/amazon_link] by Chris Chabris and Dan Simons.

[amazon_image id=”0691166269″ link=”true” target=”_blank” size=”medium” ]Irrational Exuberance[/amazon_image]   [amazon_image id=”000731731X” link=”true” target=”_blank” size=”medium” ]The Invisible Gorilla[/amazon_image]

Of course, this isn’t just an issue in financial markets. One of the interesting essays in Rebecca Solnit’s [amazon_link id=”1595341986″ target=”_blank” ]Encyclopedia of Trouble and Spaciousness[/amazon_link], which I read recently, riffs on [amazon_link id=”074325239X” target=”_blank” ]Donald Rumsfeld’s[/amazon_link] famous known knowns, known unknowns, and unknown unknowns, adding a fourth category (which she attributes to Slavoj Zizek) of unknown knowns. In her essay, the context is the scale of the US economy and policy devoted to military resources. In the financial markets, it is the existence of bubbles or stresses that exist in the data – in the world – but are not seen.

[amazon_image id=”1595341986″ link=”true” target=”_blank” size=”medium” ]The Encyclopedia of Trouble and Spaciousness[/amazon_image]

Or seen, but not allowed to rise to conscious thought and action. In the year or two before the 2008 crisis, the signals were (with hindsight) very clear – an inverted yield curve, and super-high PE ratios and house price-earnings ratios. Few people paid attention, however. But it’s extraordinarily hard to be just about the only person paying attention to unknown knowns. The Office of Financial Research was intended to be a post-crisis solution to this problem, gathering data and developing visualisations or effective methods of monitoring the markets. I don’t think it has the hoped-for impact.