Monday, August 8, 2016

Do Bubbles Exist?

Eugene Fama vs. Richard Thaler:

Thaler: I have two examples. The first is house prices. For a long period, house prices were roughly 20 times rental prices. Then, starting around 2000, they went up a lot, then they went back down after the financial crisis. 
Fama: What’s the bubble? The up? The down? The subsequent up?
Thaler: We agree that it’s impossible to know for sure whether something’s a bubble. What we do know is that in markets such as Las Vegas; Scottsdale, Arizona; and south Florida, where prices were going up the most, expectations of future price appreciation were also the highest. That could be rational, but I’m skeptical about it. 

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