The Greater Fool Theory
| The Greater Fool Theory is the belief that no matter how overvalued an asset is, there will always be someone to buy it. This theory is often used to explain why prices continue to rise even when there is no fundamental reason for them to do so. The theory is named after the idea of the "greater fool" - that is, the person who buys an asset at an inflated price, knowing that they will be selling it to someone else at an even higher price. This person is only willing to do this because they believe that there will always be a "greater fool" willing to pay even more. Of course, eventually the price of an asset will reach a point where there are no more "greater fools" willing to buy it, and the price will crash. This is what happened during the housing market crash of 2008, when prices reached a point where there were no more buyers willing to pay the asking price. The Greater Fool Theory is a controversial one, and it's important to remember that not all asset bubbles end in a crash. Sometimes, prices simply stabilize at a new, higher level. This is what happened with housing prices in many parts of the country after the 2008 crash. Prices stopped falling and began to rise again, although not to the same extent as before. Whether or not the Greater Fool Theory is true, it's important to be aware of it when making investment decisions. If you believe that an asset is overvalued, you may be right - but there's always a chance that you're the greater fool. |
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