In this article, Satyajit Chatterjee presents a counterpoint to the view that “it’s all psychology.” He reports on a theory of asset price booms and busts that is based entirely on rational decision-making and devoid of psychological elements. The explanation suggests that asset price booms and crashes are most likely to occur when the value of the asset in question depends on an innovation whose full profit potential is initially unknown to investors.

This article appeared in the Fourth Quarter 2011 edition of Business Review.

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