Running with the Devil: The Advent of A Cynical Bubble

Abstract:     
Not all bubbles are born equal. We explore the nature and underlying psychology of four different kinds of bubbles, in order to assess which comes closest to describing the current market. To us, the current market environment is largely a greater fool market. Because such markets lack fundamental support, they are liable to precipitous declines. This is exacerbated when everyone seems to be watching the same indicator (earnings optimism). As Keynes noted when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and catastrophic force.

Number of Pages in PDF File: 26

Keywords: Asset price bubbles, greater fool markets, rational bubbles, fads, myopia

JEL Classification: G00, G14, G12

working papers series