WHAT causes asset bubbles? This question is the great white whale of finance theory. We know that asset prices are given to spectacular rises and falls over short periods of time. Answering this question is hugely important, not just for people's pensions and retirement, but for the whole economy, since crashes in asset prices can leave growth in the doldrums for years.
But despite decades of research, finance academics have been unable to agree on a cause for this phenomenon. Do investors suddenly become optimistic about asset fundamentals, only to realise a couple of years later that it was all a mirage? Do they buy at prices they know are inflated, hoping to find a greater fool to sell to before...
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