Rational Agents and Irrational Bubbles

Dmitriy Krichevskiy, Elizabethtown College
Dhimitri Qirjo, State University of New York at Plattsburgh


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.