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Ok this is something I've always wondered. I just don't understand how a bunch of people can simultaneously decide that EVERYTHING is worth NOTHING (practically). I would imagine it has something to do with price/earnings multiples leading to the fact that the actual value of the securities pales in comparison to how much money is invested, but it still seems like sort of a perfect storm type situation to me.

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read george soros' Theory of Reflexivity

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just to sum up and test my memory:

IIRC, something that is reflexive, according to soros, feeds back on itself. i think an example he gave was the run up in property prices in japan in the late 80s. property values increased as demand for them soared, which caused even higher valuations and less prudent bank loans to developers. rents were extrapolated at far beyond record levels. the prices of the underlying properties caused bank loans taking that value as given (appraised) which further increased liquidity and thus feeds the ever growing demand.

then, when the bubble bursts, the reverse happens. nobody wants to take up rents that high and people rush in to sell properties at lower and lower valuations. those lower valuations make it harder to meet the loan requirements. defaults occur further pushing down property values and people need to sell even more urgently to meet liquidity needs.

sorry for the long winded summation but i think that is the dynamics of a reflexive process (one which creates distortions through a positive, and then negative feedback loop where the increase in an underlying valuation, leads to higher flows into that thing and thus higher valuations until it breaks & then the reverse occurs)

did i miss something, make an error in logic?

thanks,

Barron