Editing Speculation (section)

== Economic disadvantages ==

=== Winner's curse ===

Auctions are a method of squeezing out speculators from a transaction, but they may have their own [[perverse effects]] by the [[winner's curse]]. The winner's curse is, however, not very significant to markets with high liquidity for both buyers and sellers, as the auction for selling the product and the auction for buying the product occur simultaneously, and the two prices are separated only by a relatively small spread. That mechanism prevents the winner's curse phenomenon from causing mispricing to any degree greater than the spread.<!-- {{Citation needed|date=June 2008}} Simple math. see the definition of Winner's curse! removed with prejudice by Fabartus 2016-10-26 --->

=== Economic bubbles ===
Speculation is often associated with [[economic bubble]]s.<ref>{{Cite journal|last1=Teeter|first1=Preston|last2=Sandberg|first2=Jorgen|date=2017|title=Cracking the enigma of asset bubbles with narratives|journal=Strategic Organization|volume=15|issue=1|pages=91–99|doi=10.1177/1476127016629880|s2cid=156163200}}</ref> A bubble occurs when the price for an asset exceeds its intrinsic value by a significant margin,<ref name=Fleischer>{{cite book |url=https://books.google.com/books?id=1ZASrmGg6uIC&q=speculative+speculation+bubbles&pg=PA40 |title=Booms, Bubbles, & Busts (The Global Marketplace) |last=Hollander |first=Barbara Gottfried |year=2011 |publisher=Heinemann Library |pages=40–41 |isbn=978-1432954772}}</ref> although not all bubbles occur due to speculation.<ref name="LNP 2001 831">{{Harvnb|Lei|Noussair|Plott|2001|p=831}}: "In a setting in which speculation is not possible, bubbles and crashes are observed. The results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation, but rather by behavior that itself exhibits elements of irrationality."</ref> Speculative bubbles are characterized by rapid market expansion driven by word-of-mouth [[feedback loop]]s, as initial rises in asset price attract new buyers and generate further inflation.<ref name=Rosser>{{cite book |url=https://books.google.com/books?id=mIluNwn5K8IC&q=From+Catastrophe+to+Chaos:+a+General+Theory+of+Economic+Discontinuities |title=From Catastrophe to Chaos: A General Theory of Economic Discontinuities: Mathematics, Microeconomics, Macroeconomics, and Finance |last=Rosser |first=J. Barkley |year=2000 |page=107|publisher=Springer |isbn=9780792377702 }}</ref> The growth of the bubble is followed by a precipitous collapse fueled by the same phenomenon.<ref name=Fleischer/><ref name=Shiller>{{cite web |url=http://www.project-syndicate.org/commentary/bubbles-without-markets |title=Bubbles without Markets |last=Shiller |first=Robert J. |date=23 July 2012 |access-date=29 August 2012}}</ref> Speculative bubbles are essentially social epidemics whose contagion is mediated by the structure of the market.<ref name=Shiller/> Some economists link asset price movements within a bubble to fundamental economic factors such as cash flows and discount rates.<ref name=Siegel>{{cite journal |url=http://www.blackwellpublishing.com/pdf/EUFM_Siegel.pdf |title=What Is an Asset Price Bubble? An Operation Definition|last=Siegel|first=Journal |journal=European Financial Management |volume=9 | issue=1 |year=2003 |pages=11–24 |doi=10.1111/1468-036x.00206|s2cid=154819558}}</ref>

In 1936, [[John Maynard Keynes]] wrote: "Speculators may do no harm as bubbles on a steady stream of [[Entrepreneurship|enterprise]]. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation. (1936:159)"<ref>{{Cite web|url=http://www.stampoutpoverty.org/?lid=9889 |title=A Sterling Solution |author=Dr. Stephen Spratt of Intelligence Capital |date=September 2006 |work=Stamp Out Poverty report|publisher=Stamp Out Poverty Campaign |page=15|access-date=2 January 2010}}</ref> Keynes himself enjoyed speculation to the fullest, running an early precursor of a [[hedge fund]]. As the Bursar of the Cambridge University King's College, he managed two investment funds, one of which, called Chest Fund, invested not only in the then 'emerging' market US stocks, but to a smaller extent periodically included commodity futures and foreign currencies (see Chua and Woodward, 1983). His fund was profitable almost every year, averaging 13% per year, even during the [[Great Depression]], thanks to very modern investment strategies, which included inter-market [[diversification (finance)|diversification]] (it invested in stocks, commodities and currencies) as well as [[shorting]] (selling borrowed stocks or futures to profit from falling prices), which Keynes advocated among the principles of successful investment in his 1933 report: "a balanced investment position... and if possible, opposed risks".<ref>{{cite journal|jstor=4478643 |title=  The Investment Wizardry of J. M. Keynes|year=1983 |pages=35–37 |volume=39|last1= Chua|first1= J. H.|last2= Woodward|first2= R. S.|journal= Financial Analysts Journal|issue= 3|doi= 10.2469/faj.v39.n3.35}}</ref>

It is controversial whether the presence of speculators increases or decreases short-term [[volatility (finance)|volatility]] in a market. Their provision of capital and information may help stabilize prices closer to their true values. On the other hand, crowd behavior and positive feedback loops in market participants may also increase volatility.