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Iva P

on 21 February 2013

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Transcript of Bubbles2

Bubbles Source: House Price South Africa So what is a bubble? An artificially high level of price that
exceeds the intrinsic value
.....and people know about it! Modeling: No widely accepted theory to explain them
Irrational traders (greater fool theory)
Asymmetric information -lack of coordination
RI How to climb a mountain approach Pick the mountain
Choose equipment
Get advice from the wise elderly
Enjoy the changing landscape (new insight) - see what you have not seen yet
Go the extra mile Abreu and Brunnermeier Cost of not knowing < cost of information How does it work? Enter the market Two groups of agents
Irrational traders
Rational traders
Receive signals about the bubble
Decision - stay or leave
Ride the bubble for tau periods No misallocation Imagine a world without bubbles No messy aftermath Bibliography D. Abreu, K. Brunnermeier. 2003. Bubbles and Crashes. Econometrica, vol. 71, No.1

C. Sims. 2003. Implications of Rational Inattention. Journal of Monetary Economics 50(3), 665-690

M.Yang. 2012, Coordination with Flexible Information Acquisition. Available at SSRN: http://ssrn.com/abstract=2103970 The result comes from:
No common knowledge
Uncertainty about others' information
Heterogeneous timing of signals INATTENTION Research question Why are people inattentive to a bubble?
How long are they inattentive?
What is the reason that causes them to start being attentive? Inattention to
information Endogenous Heterogenous mental costs
Enough people become attentive Summary Information acquisition - important in the formation of bubbles

RI could help to understand it better
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