26 Pages Posted: 26 Jan 2004
Date Written: January 16, 2003
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.
Keywords: Asset price bubbles, greater fool markets, rational bubbles, fads, myopia
JEL Classification: G00, G14, G12
Suggested Citation: Suggested Citation