Summary
Jonathan Swift, the Irish-born English author of Gulliver's Travels, wrote a poem in December 1720 that probably made the first reference to a “bubble” as being a stock price that far exceeded its economic value. Since then asset price bubbles have been extensively reported and studied, with many detailed accounts already extant on the presumed causes, settings, and general characteristics of bubbles.
A review of the literature nevertheless indicates that, although economists constantly talk about bubbles and have conducted numerous studies of them, there has thus far been little progress toward a commonly accepted (or standardized) mathematical and statistical definition or method of categorization and measurement that comes close to describing how investors actually behave in the midst of such extreme episodes.
In fact, most studies outside of the behavioral finance literature take rationality as a starting point and a given, even though this axiomatic assumption – itself an outgrowth of neoclassical economics – remains unproven and debatable. It is the intent of this study to conduct an exploration and analysis that might eventually lead to a robust, unified general theory applicable to all types and sizes of financial-market, and, more broadly, asset-price bubbles (and also crashes). At a minimum, a comprehensive theory of asset-price bubbles would appear to require that the descriptive elements be consistent with the ways in which people actually behave.
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- Financial Market Bubbles and Crashes , pp. xvii - xxviPublisher: Cambridge University PressPrint publication year: 2009