Greater fool theory
|This article needs additional citations for verification. (May 2014)|
||This article uses bare URLs for citations, which may be threatened by link rot. (May 2014)|
The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. Or one may rationally have the expectation that the item can be resold to a "greater fool" later.
In the stock market, the greater fool theory is also called survivor investing, is defined by Investopedia as the belief held by someone who makes a questionable investment, with the assumption that they will be able to sell it later to "a greater fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price. It is similar in concept to the Keynesian beauty contest principle of stock investing.
Art is another commodity in which speculation and privileged access drive prices, not intrinsic value. In November 2013, hedge fund manager Steven A. Cohen of SAC Capital was selling artworks at auction which he only recently acquired through private transactions. Works included paintings by Gerhard Richter and Rudolf Stingel and a sculpture by Cy Twombly. They were expected to sell for up to $80 million. In reporting the sale, the New York Times notes that, "Ever the trader, Mr. Cohen is also taking advantage of today’s active art market where new collectors will often pay far more for artworks than they are worth."
- Investor Glossary - greater fool theory
- Business Dictionary Greater Fool Theory
- CNN - Money
- Law Dictionary - Definition of Greater Fool Theory
- William Bruss,Greater Fool Theory Can Lead To Expensive Home Investment, Chicago Tribune - July 12, 1986
- Wise Geek Greater Fool Theory
- The Greater Fool Theory: Managing and Modeling Risk, New York Society of Security Analysts
- Investopedia definition of Greater Fool Theory
- Under Fire, Hedge-Fund Billionaire to Sell Choice Art, New York Times, Oct. 31, 2013, retrieved Oct. 31, 2013