Journal of Economic Psychology 28 (2007) 351–364 www.elsevier.com/locate/joep 0167-4870/$ - see front matter  2006 Elsevier B.V. All rights reserved. doi:10.1016/j.joep.2006.08.001 Decision-rule cascades and the dynamics of speculative bubbles Peter E. Earl ¤ , Ti-Ching Peng, Jason Potts School of Economics, University of Queensland, St Lucia, Brisbane, QLD 4072, Australia Received 20 December 2005; received in revised form 7 August 2006; accepted 29 August 2006 Available online 13 October 2006 Abstract We combine Minsky’s Wnancial fragility analysis, behavioural analysis of decision rules and the evolutionary economics of rule trajectories to provide an empirically grounded and computationally tractable theory of the complex evolutionary dynamics of speculative Wnancial upswings. The behav- ioural dynamics of asset bubbles can be conceptualized as the joint consequence of the adoption and diVusion process of new investment decision rules coupled with the degradation of those rules as they pass from a few expert investors to larger population of amateurs. We illustrate this using data cover- ing the recent Brisbane property market bubble (1999–2003) and show how it is consistent with the existence of such cascading decision rules. We then explain how multi-agent simulation methods can be used for modelling decision rule cascades.  2006 Elsevier B.V. All rights reserved. JEL classiWcation: D81; D84; G11 PsycINFO classiWcation: 3020; 3040; 3920 Keywords: Investor expertise; Financial instability; Housing price bubbles; Tacit knowledge 1. Introduction Macroeconomic theory has plausible and straightforward explanations both for asset price movements that take the form of small, rapid, step-like adjustments to changes in the * Corresponding author. Tel.: +61 7 3365 6598; fax: +61 7 3365 7299. E-mail address: p.earl@economics.uq.edu.au (P.E. Earl).