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There’s an article in the Sunday NY Times Business Section and one in the Economist. I have to say I’ve never seen anything really comforting from a theoretical point of view on this topic, and I once wrote a paper on this too. The Economist does refer to a sort of probabilistic model from which one might perhaps back out some implied probabilities of bubbles.

It seems to me:

1. No one knows what fair value of anything is, though one can begin to tell when it gets to be unfair. Fischer Black wrote somewhere that a price anywhere between half and twice is fair value is fair value. If you run this recursively, you get a range from zero to infinity.

2. People are strongly influenced by other people’s opinions.

3. People try to figure out what other people will do.

4. People have a tendency to get on moving trains.

Is there a way to turn all this into a convincing model?

Published in Models