Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    Diagnostic Bubbles
    18 Feb 2019Working Paper Summaries

    Diagnostic Bubbles

    by Pedro Bordalo, Nicola Gennaioli, Spencer Yongwook Kwon, and Andrei Shleifer
    The financial crisis of 2007-2008 revived academic interest in price bubbles but many conceptual questions remain open. This paper generates insights into the structure of asset price bubbles by modeling beliefs from fundamental psychological assumptions, and combining this with standard neoclassical mechanisms, such as learning from prices and speculation.
    LinkedIn
    Email

    Author Abstract

    We introduce diagnostic expectations into a standard setting of price formation in which investors learn about the fundamental value of an asset and trade it. We study the interaction of diagnostic expectations with two well-known mechanisms: learning from prices and speculation (buying for resale). With diagnostic (but not with rational) expectations, these mechanisms lead to price paths exhibiting three phases: initial underreaction, followed by overshooting (the bubble), and finally a crash. With learning from prices, the model generates price extrapolation as a byproduct of fast moving beliefs about fundamentals, which lasts only as the bubble builds up. When investors speculate, even mild diagnostic distortions generate substantial bubbles.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: December 2018
    • HBS Working Paper Number: NBER Working Paper Series, No. 25399
    • Faculty Unit(s): Negotiation, Organizations & Markets
      Trending
        • 18 Apr 2022
        • HBS Case

        Dick’s Sporting Goods Followed Its Conscience on Guns—and It Paid Off

        • 21 Jun 2022
        • HBS Case

        Free Isn’t Always Better: How Slack Holds Its Own Against Microsoft Teams

        • 10 Dec 2021
        • Research & Ideas

        Truth Be Told: Unpacking the Risks of Whistleblowing

        • 22 Jun 2022
        • Book

        Four Elements for Finding the Right Career Path

        • 25 Jan 2022
        • Research & Ideas

        More Proof That Money Can Buy Happiness (or a Life with Less Stress)

    Andrei Shleifer
    Andrei Shleifer
    Visiting Professor of Business Administration
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Price Bubble
    • Investment
    • Financial Services

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College