by Joakim Book
The American Institute for Economic Research
A seemingly simple question has bothered the discipline of finance for decades: what is a bubble? In a theoretical sense it’s a banal question: if the price of an asset is trading much higher than what it’s actually worth, it’s a bubble; if not, then it isn’t.
But who says? It’s not like we can rock up to the Chicago trading pits or the New York Stock Exchange and just observe an “actual” value next to the price, and quickly calculate a bubble ratio. There’s nobody around to, credibly and reliably, tell us what its real value is. When somebody inevitably does say what an asset is *really* worth, why would their opinion, unbacked by money (or biased by talking their own book), be more accurate than the sum total of the market that actually trades the asset?