Friday, January 09, 2009

Financial Bubbles Explained

Good Virginia Postrel article on financial bubbles, and experimental economics on the subject.
For the price to track the fundamental value, “everybody has to know that everybody knows that everybody is rational.” That’s rarely the case. Rather, “if you put people in asset markets, the first thing they do is not try to figure out the fundamental value. They try to buy low and sell high.” That speculation creates a bubble.

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