Prabhupada, December 31, 1973, Los Angeles: […] Indian economy was that if you have got extra money, you get gold ornament for your wife. So then your money is stocked there. Or purchase some utensils, silver utensils. That was Indian economy. This depositing in the bank and thinking that I am getting good interest, that is another cheating.
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httpv://youtu.be/LStQou6DFOI
video: BBC News
Bubbles – Princeton University
Abstract
Bubbles refer to asset prices that exceed an asset’s fundamental value because current owners believe that they can resell the asset at an even higher price in the future.
There are four main strands of models that identify conditions under which bubbles can exist. The first class of models assumes that all investors have rational expectations and identical information. These models generate the testable implication that bubbles have to follow an explosive path.
In the second category of models investors are asymmetrically informed and bubbles can emerge under more general conditions because their existence need not be commonly known. A third strand of models focuses on the interaction between rational and behavioral traders.
Bubbles can persist in these models since limits to arbitrage prevent rational investors from eradicating the price impact of behavioral traders. In the final class of models, bubbles can emerge if investors hold heterogeneous beliefs, potentially due to psychological biases, and they agree to disagree about the fundamental value. Experiments are useful to isolate, distinguish and test the validity of different mechanisms that can lead to or rule out bubbles.
Bubbles are typically associated with dramatic asset price increases followed by a collapse. Bubbles arise if the price exceeds the asset’s fundamental value. This can occur if investors hold the asset because they believe that they can sell it at an even higher price to some other investor even though the asset’s price exceeds its fundamental value.
Famous historical examples are the Dutch Tulip Mania (1634-7), the Mississippi Bubble (1719-20), the South Sea Bubble (1720) and the “Roaring 20’s” that preceded the 1929 crash. More recently, internet share prices (CBOE Internet Index) surged to astronomical heights until March 2000, before plummeting by more than 75% by the end of 2000.
Since asset prices affect the real allocation of an economy, it is important to understand the circumstances under which these prices can deviate from their fundamental value. Bubbles have long intrigued economists and led to several strands of models, empirical tests, and experimental studies.
We can broadly divide the literature into four groups. The first two groups of models analyze bubbles within the rational expectations paradigm, but differ in their assumption whether all investors have the same information or are asymmetrically informed. A third
group of models focuses on the interaction between rational and non-rational (behavioral) investors. In the final group of models traders’ prior beliefs are heterogeneous, possibly due to psychological biases, and consequently they agree to disagree about the fundamental value of the asset.
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