The subprime meltdown is the latest example of flawed logic that resulted in a bubble and house of cards. I mean, what were these people thinking? You have people with no proof of income being able to take out a mortgage equal to 100 per cent of the appraised value of a home? And a finance industry that arms itself with all sorts of creative financing that zero in on the short-term prospects of high-risk borrowers. And a system system that makes itself completely dependent on the ability of high-risk borrowers to make their mortgage payments. So what do you expect?

But then, this faulty logic is there in all bubbles. In the dot com bubble, for instance, there was enormous money from IPOs in start-ups that not only had never made a profit. Some hadn't even made any revenue. Why did investors, goaded by market forecasts from IT research firms, such as IDC, Gartner and Forrester Research, rush to buy almost anything even vaguely associated with the Internet, regardless of valuation? What was going on in their brains that made them ignore huge losses and pay 100 times expected earnings?

The same applies to the madness and illusion leading up to the 1929 Crash when the Dow Jones Industrial average skyrocketed 250 per cent in just two years. As John Kenneth Galbraith was to write later: "Men have been swindled by other men on many occasions. The autumn of 1929 was, perhaps, the first occasion when men succeeded on a large scale in swindling themselves."

That's what attracted me to a interesting paper out of Stanford University, the National Bureau of Economic Research, and Fuqua School of Business. Interesting and alarming.

The paper, Technological innovation and real investment booms and busts, found that what investors fear the most is not the risk of a loss. It's the risk that they may do poorly relative to their peers. When it comes to certain kinds of technology, keeping up with the Joneses drives investment decisions.

Cut through the algebra and academic language, and the findings make sobering reading. Relative wealth is everything, the researchers say, and turns investors into sheep.

"This externality induces a herding incentive: agents choose to make investment decisions that are similar to those of the rest of the population to avoid being poor when their cohort is wealthy," they say. "If agents are sensitive to the wealth of others, making different investment decisions than the crowd increases the risk of their relative wealth. The riskier the technology, the greater is agents' concern for being left behind, and the stronger the herding effect."

In other words, investors fear being poor when everyone around them is rich. Particularly if they are living in communities where real estate, day care and just the general cost of living is high.

The researchers found that investors tend to herd around high-tech investments that have the potential to revolutionize the entire market and promise a big upside. In most cases, they are likely to go bust but investors crowd in thinking all they have to do to make money is hit the jackpot. And when that crowding happens, the price of the assets they hold become inflated.

Still, there is one consolation to this sort of behavior. When things go belly-up, as they inevitably do, investors can turn around and say it's not that bad. After all, everyone lost their shirt. In that case, keeping up with the Joneses has an upside. Misery loves company.