Greater fool theory
The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by the often 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 real estate the greater fool theory can drive investment under the expectation that prices will rise, or force need-based-buyers to out bid irrational or ill-informed buyers. A need-basis can be for basic housing or for organizations fulfilling exigent commercial interests. This phenomenon may also occur among banks offering real estate financing.
In the stock market, the greater fool theory (also called survivor investing) is 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.
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 is selling artworks at auction which he only recently acquired through private transactions. Works include paintings by Gerhard Richter and Rudolf Stingel and a sculpture by Cy Twombly. They are 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."
It is similar in concept to the Keynesian beauty contest principle of stock investing.
- 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