Editing Stock market bubble (section)

== Whether rational or irrational ==
Emotional and cognitive biases (see [[behavioral finance]]) seem to be the causes of bubbles, but often, when the phenomenon appears, pundits try to find a rationale, so as not to be against the crowd. Thus, sometimes, people will dismiss concerns about overpriced markets by citing a [[new economy]] where the old stock valuation rules may no longer apply. This type of thinking helps to further propagate the bubble whereby everyone is investing with the intent of finding a [[Greater fool theory|greater fool]].  Still, some analysts cite the wisdom of crowds and say that price movements really do reflect [[rational expectations]] of fundamental returns. Large traders become powerful enough to rock the boat, generating stock market bubbles.<ref>Sergey Perminov, Trendocracy and Stock Market Manipulations (2008, {{ISBN|978-1-4357-5244-3}}).</ref>

To sort out the competing claims between behavioral finance and efficient markets theorists, observers need to find bubbles that occur when a readily available measure of fundamental value is also observable.  The bubble in closed-end country funds in the late 1980s is instructive here, as are the bubbles that occur in experimental asset markets.  According to the [[efficient-market hypothesis]], this doesn't happen, and so any data is wrong.<ref>{{cite news|title=How Did Economists Get It So Wrong?|url=https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html|newspaper=The New York Times|date=2009-09-02|last1=Krugman|first1=Paul}}</ref> For closed-end country funds, observers can compare the stock prices to the net asset value per share (the net value of the fund's total holdings divided by the number of shares outstanding).  For experimental asset markets, observers can compare the stock prices to the expected returns from holding the stock (which the experimenter determines and communicates to the traders).

In both instances, closed-end country funds and experimental markets, stock prices clearly diverge from fundamental values.  Nobel laureate Dr. [[Vernon L. Smith|Vernon Smith]] has illustrated the closed-end country fund phenomenon with a chart showing prices and net asset values of the {{ill|Spain Fund|zh|伊利比亞美洲基金}} in 1989 and 1990 in his work on price bubbles.<ref>{{cite journal |title=Stock Market Bubbles in the Laboratory |date=2003 |journal= The Journal of Behavioral Finance |volume=4 |number=1 |pages= 7–20 |language=en |last1=Porter |first1= David P. |last2=Smith |first2=Vernon L.|author2-link=Vernon L. Smith|doi=10.1207/S15427579JPFM0401_03 |s2cid=8561988 }}</ref> At its peak, the Spain Fund traded near $35, nearly triple its Net Asset Value of about $12 per share.  At the same time the Spain Fund and other closed-end country funds were trading at very substantial premiums, the number of closed-end country funds available exploded thanks to many issuers creating new country funds and selling the IPOs at high premiums.

It only took a few months for the premiums in closed-end country funds to fade back to the more typical discounts at which closed-end funds trade.  Those who had bought them at premiums had run out of "greater fools".  For a while, though, the supply of "greater fools" had been outstanding.