AbstractMinimalist economists stubbornly resist Charles Kindleberger's characterization of investor expectations in a financial bubble as "irrational." This paper seeks to resolve the controversy by imbedding Kindleberger's well-researched, impressionistic theory of financial crises into an expanded, but still-minimalist model of rational expectations. Introducing the concepts of malicious disinformation and rational overpromotion creates an informational environment in which it is time-consuming and costly to distinguish fact from fiction. Rationality still requires that expectations and market fundamentals move together over long periods of time, but dishonorable overpromoters can earn substantial profits in the interim.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10847.
Date of creation: Oct 2004
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Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- N2 - Economic History - - Financial Markets and Institutions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-11-22 (All new papers)
- NEP-IFN-2004-11-22 (International Finance)
- NEP-PKE-2004-11-22 (Post Keynesian Economics)
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- Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring.
- Stephen F. Le Roy, 2004. "Rational Exuberance," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 783-804, September.
- Arrow, Kenneth J, 1982. "Risk Perception in Psychology and Economics," Economic Inquiry, Western Economic Association International, vol. 20(1), pages 1-9, January.
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