The default by Dubai is a significant investment event which while thought about and discussed in the newspapers was never really discounted. The announcement on Thanksgiving did not give investors time to digest the news. Money poured into Dubai even while the real estate boom turned in the rest of the world. Construction continued even when oil prices declined. This should not have been a surprise.
It reminds me of the comments by Keynes on banking and expectations:
"The sound banker, alas is not one who sees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows so that no one can really blame him."
Keynes on expectations:
"The investor will be affected as is obvious not by the net income which he will actually receive from his investment in the long run but by his expectations. These will often depend upon fashion, upon advertisement, or upon purely irrational waves of optimism or pessimism. Similarly, by risk we mean not the real risk as measured by the actual average of the class of investment over the period of years to which the expectation refers but the risk as it is estimated, wisely or foolishly, by the investor."
His view on deflation:
"The fact of falling prices injures entrepreneurs consequently the fear of falling prices causes then to protect themselves by curtailing their operations."
On speculation:
"Speculators may do no harm as bubbles on a steady stream of enterprise. Bu the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino , the job is likely to be ill-done."
On being a contrarian:
"Is not the rule for an investor to be in the minority? It is the only sphere of life and activity where victory, security is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share that, I am learning from experience, is the right moment for selling it."
"It may often profit the wisest to anticipate mob psychology rather than the real trend of events and to ape unreason poleptically. .. to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years."
From Robert Skidelsky, Keynes: The Return of the Master
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