Rational Agents and Irrational Bubbles
Handbook of Investors' Behavior during Financial Crises
We present a theoretical model demonstrating formation, growth, and crushes of bubbles. Our model does not rely on overconfidence, "animal spirits," or any sort of naïve market participants. We show how rational traders knowingly and willingly participate in bubbles markets. We also demonstrate how bubbles burst and examine endogenous as well as exogenous forces responsible for the collapse. This model has broad appeal as it offers an explanation for the important economic phenomena of business and market cycles.
Krichevskiy, Dmitriy and Qirjo, Dhimitri, "Rational Agents and Irrational Bubbles" (2017). Faculty Publications. 1073.