Defining a bubble

From a very interesting paper using a predator-prey model to capture the business cycle:

"From a financial markets viewpoint, the implication is of course that everyone could be buying a stock that each one of the investors privately thinks is overvalued, but which nevertheless keeps soaring because the purchase decision is not made on the basis on one's individual assessment of the asset value itself but of everyone else's assessment: in short, this interpretation says that, in a financial 'bubble', an asset price would go up because everyone is buying it, and everyone would buy it because it is going up, regardless of its fundamentals."

This definition seems sound to me, and contra Scott Sumner, it shows how we can have a bubble even if we cannot reliably profit from the fact that it exists: we have no idea how long people will keep buying an asset because everyone else is buying it.


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