Editing Greater fool theory

{{Short description|Theory that the price of an object is determined by consumer demand}}
{{Use dmy dates|date=January 2023}}
In finance, the '''greater fool theory''' suggests that one can sometimes make money through [[speculation]] on overvalued {{nowrap|assets{{hsp}}{{mdash}}}}{{hsp}}items with a purchase price drastically exceeding the intrinsic value{{hsp}}{{mdash}}{{hsp}}if those assets can later be resold at an even higher price. 

In this context, one "lesser fool" might pay for an overpriced asset, hoping that they can sell it to an even "greater fool" and make a profit. This only works as long as there are enough new "greater fools" willing to pay higher and higher prices for the asset. Eventually, investors can no longer deny that the price is out of touch with reality, at which point a sell-off can cause the price to drop significantly until it is closer to its fair value, which in some cases could be zero.<ref>{{Cite web |title=Greater Fool Theory Definition - What is Greater Fool Theory? |url=http://www.investorglossary.com/greater-fool-theory.htm |access-date=6 March 2015 |publisher=Investorglossary.com |archive-date=2 April 2015 |archive-url=https://web.archive.org/web/20150402094702/http://www.investorglossary.com/greater-fool-theory.htm |url-status=dead }}</ref><ref>{{Cite web |title=What is greater fool theory? definition and meaning |url=http://www.businessdictionary.com/definition/greater-fool-theory.html |url-status=dead |archive-url=https://web.archive.org/web/20071223051453/http://www.businessdictionary.com/definition/greater-fool-theory.html |archive-date=23 December 2007 |access-date=6 March 2015 |publisher=Businessdictionary.com}}</ref><ref>{{Cite web |last=Fox |first=Justin |date=11 June 2001 |title=When Bubbles Burst Tulips. Dot-coms. Hey, manias happen. But most don't lead to economic disaster. - June 11, 2001 |url=https://money.cnn.com/magazines/fortune/fortune_archive/2001/06/11/304604/index.htm |access-date=6 March 2015 |publisher=CNN}}</ref><ref>{{Cite web |last=Bogan |first=Vicki |title=The Greater Fool Theory: What is it? |url=http://bogan.dyson.cornell.edu/doc/Hartford/Bogan-9_GreaterFools.pdf }}</ref> The last "fools" to purchase in on the product in question are then left [[holding the bag]], allowing earlier, lesser fools to make off with the profit.

== Crowd psychology ==
{{see also|Crowd psychology}}
Due to [[cognitive bias]] in human behavior, some people are drawn to assets whose price they see increasing, however irrational it might be.<ref>{{Cite web |date=30 December 2020 |title=Oxford Business Review - The Greater Fool Theory |url=https://oxfordbusinessreview.org/the-greater-fool-theory/ |access-date=7 November 2021 |website=Oxford Business Review |language=en-US |archive-date=3 March 2021 |archive-url=https://web.archive.org/web/20210303010655/https://oxfordbusinessreview.org/the-greater-fool-theory/ |url-status=dead }}</ref> This effect is often further exacerbated by [[herd mentality]], whereby people hear stories of others who bought in early and made big profits, causing those who did not buy to feel a [[fear of missing out]]. This effect was explained by economics professor Burton Malkiel in his book ''[[A Random Walk Down Wall Street]]'':

{{quote|A bubble starts when any group of stocks, in this case those associated with the excitement of the Internet, begin to rise. The updraft encourages more people to buy the stocks, which causes more TV and print coverage, which causes even more people to buy, which creates big profits for early Internet stockholders. Successful investors tell you at cocktail parties how easy it is to get rich, which causes the stocks to rise further, which pulls in larger and larger groups of investors. But the whole mechanism is a kind of Ponzi scheme where more and more credulous investors must be found to buy the stock from the earlier investors. Eventually, one runs out of greater fools.|Burton Malkiel<ref>{{Cite book |last=Burton |first=Malkiel |title=A Random Walk Down Wall Street |year=1985 |publisher=Norton |isbn=9780393019995}}</ref>}}

==Examples==

In real estate, the greater fool theory can drive investment through the expectation that prices always rise.<ref>{{Cite web |date=12 July 1986 |title='Greater Fool Theory' Can Lead To Expensive Home Investment |url=https://www.chicagotribune.com/1986/07/12/greater-fool-theory-can-lead-to-expensive-home-investment/ |access-date=6 March 2015 |website=Chicago Tribune}}</ref><ref>{{Cite web |date=17 February 2015 |title=What is the Greater Fool Theory? (with pictures) |url=http://www.wisegeek.com/what-is-the-greater-fool-theory.htm |access-date=6 March 2015 |publisher=Wisegeek.com}}</ref> A period of rising prices may cause lenders to underestimate the risk of default.<ref>{{Cite web |date=21 July 2010 |title=The Greater Fool Theory: Managing and Modeling Risk - The Finance Professionals' Post |url=http://post.nyssa.org/nyssa-news/2010/07/the-greater-fool-theory-managing-and-modeling-risk.html |access-date=6 March 2015 |publisher=Post.nyssa.org |archive-date=5 February 2011 |archive-url=https://web.archive.org/web/20110205185254/http://post.nyssa.org/nyssa-news/2010/07/the-greater-fool-theory-managing-and-modeling-risk.html |url-status=dead }}</ref>

In the [[stock market]], the greater fool theory applies when many investors make a questionable investment, with the assumption that they will be able to sell it later to "a greater fool". In other words, they buy something not because they believe that it is worth the price, but rather because they believe that they will be able to sell it to someone else at an even higher price.<ref>{{Cite web |title=Greater Fool Theory Definition |url=http://www.investopedia.com/terms/g/greaterfooltheory.asp |access-date=6 March 2015 |publisher=Investopedia}}</ref>

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 at auction artworks that he had 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&nbsp;million. In reporting the sale, ''[[The New York Times]]'' noted 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."<ref>{{Cite news |last1=Vogel |first1=Carol |last2=Lattman |first2=Peter |date=30 October 2013 |title=Steven A, Cohen to Sell Works at Sothebys and Christies |work=[[The New York Times]] |url=https://www.nytimes.com/2013/10/31/arts/design/steven-a-cohen-to-sell-works-at-sothebys-and-christies.html |access-date=6 March 2015}}</ref>

[[Cryptocurrencies]] have been characterized as examples of the greater fool theory.<ref>{{Cite journal |last1=Polasik |first1=Michal |last2=Piotrowska |first2=Anna |last3=Wisniewski |first3=Tomasz Piotr |last4=Kotkowski |first4=Radossaw |last5=Lightfoot |first5=Geoff |date=2014 |title=Price Fluctuations and the Use of Bitcoin: An Empirical Inquiry |url=http://dx.doi.org/10.2139/ssrn.2516754 |journal=SSRN Electronic Journal |doi=10.2139/ssrn.2516754 |s2cid=219377958 |issn=1556-5068|url-access=subscription }}</ref><ref>{{Cite magazine
| archive-url= https://web.archive.org/web/20210129113541/http://governance40.com/wp-content/uploads/2018/12/adriano-1.pdf
| archive-date= 29 January 2021
| quote = Anyone who bought Bitcoin in the last two months of 2017, when the price reached almost $20,000, has been played for a greater fool.
| first = Andreas | last= Andriano
|title= A Short History of Crypto Euphoria
|url=http://governance40.com/wp-content/uploads/2018/12/adriano-1.pdf 
|access-date=11 January 2023 |url-status= unfit
| magazine= Finance & Development
| date= June 2018
| pages= 20–21
}}</ref> Numerous economists, including several [[Nobel laureates]], have described cryptocurrency as having no intrinsic value whatsoever.<ref name="BMH">{{Cite news |last=Quiggin |first=John |date=16 April 2013 |title=The Bitcoin Bubble and a Bad Hypothesis |work=The National Interest |url=http://nationalinterest.org/commentary/the-bitcoin-bubble-bad-hypothesis-8353 |url-status=live |archive-url=https://web.archive.org/web/20141022081554/http://nationalinterest.org/commentary/the-bitcoin-bubble-bad-hypothesis-8353 |archive-date=22 October 2014 |df=dmy-all}}</ref><ref name="Shiller">{{Cite news |last=Shiller |first=Robert |date=1 March 2014 |title=In Search of a Stable Electronic Currency |work=The New York Times |url=https://www.nytimes.com/2014/03/02/business/in-search-of-a-stable-electronic-currency.html |url-status=live |archive-url=https://web.archive.org/web/20141024120222/http://www.nytimes.com/2014/03/02/business/in-search-of-a-stable-electronic-currency.html?_r=0 |archive-date=24 October 2014 |df=dmy-all}}</ref><ref name="4Nobels">{{Cite news |last=Wolff-Mann |first=Ethan |date=27 April 2018 |title='Only good for drug dealers': More Nobel prize winners snub bitcoin |work=Yahoo Finance |url=https://finance.yahoo.com/news/good-drug-dealers-nobel-prize-winners-snub-bitcoin-184903784.html |url-status=live |archive-url=https://web.archive.org/web/20180612141128/https://finance.yahoo.com/news/good-drug-dealers-nobel-prize-winners-snub-bitcoin-184903784.html |archive-date=12 June 2018}}</ref>

In contrast, in times of [[hyperinflation]] or in remote regions, the prices of necessities can be so exorbitant that relative to normal [[Market (economics)|markets]] these prices may seem arbitrary. Yet the local cost of doing business relative to the price in these regions, as well as the necessity to feed and shelter oneself in a hyper-inflationary crisis, justifies through profit or actual benefit the "foolish" price. In these cases, there is no "bubble", even though prices are very high.

==In popular culture==

The tenth and final episode of the first season of ''[[The Newsroom (American TV series)|The Newsroom]]'', written by [[Aaron Sorkin]], is titled "The Greater Fool," which is also the title of the diegetic cover story about [[The Newsroom (American TV series)#Main cast|Will McAvoy]] in a fictional edition of [[New York (magazine)|New York magazine]] that features in the episode: at one point, McAvoy is struck repeatedly with a copy.<ref name=TNR>{{cite episode|title=The Greater Fool|series=[[The Newsroom (American TV series)]]|season=1|issue=10|time=3:03-310, 8:23-8:37; 49:42-50:15|network=[[HBO]]|date=26 August 2012|credits=[[Aaron Sorkin]] (writer), Greg Mottola (director)}}</ref>

Later in the episode, economist and fellow anchor Sloan Sabbith, in an attempt to console McAvoy about the unflattering article, explains the concept to him in an ironic light:

{{blockquote|“The greater fool is actually an economic term: it’s a patsy. […] For the rest of us to profit, we need a greater fool, someone who will buy long and sell short. Most people spend their lives trying not to be the greater fool: we toss him the hot potato, we dive for his seat when the music stops. The greater fool is someone with the perfect blend of self-delusion and ego to think that he can succeed where others have failed. This whole country [the United States] was made by greater fools.” <ref name=ShowBiz>{{cite encyclopedia|type=Edited collection|first=Carlos|last=Rodriguez Braun|entry=The Newsroom|title=Show and Biz: The Market Economy in TV Series and Popular Culture (2000-2020)|editor-last1=Blanco|editor-first1=Maria|editor-last2=Mingardi|editor-first2=Alberto|publisher=[[Bloomsbury Publishing|Bloomsbury Academic]]|year=2023|pages=175-196|quote-page=191}}</ref><ref name=TNR />}}

==See also==
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{{div col|colwidth=30em}}
* [[Arbitrage]]
* [[Bagholder]]
* [[Beanie Babies]]
* [[Economic bubble]]
* [[Non-fungible token]]
* [[Ponzi scheme]]
* [[Speculation]]
* [[Subjective theory of value]]
* [[Tulip mania]]
{{div col end}}

==References==
{{Reflist}}

[[Category:Investment]]