Bubbles and Crashes with Partially Sophisticated Investors

Bianchi, Milo; Jehiel, Philippe

Bubbles and Crashes with Partially Sophisticated Investors

Milo Bianchi () and Philippe Jehiel ()
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Milo Bianchi: TSE-R - TSE-R Toulouse School of Economics – Recherche - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: We analyze bubbles and crashes in a model in which some investors are partially sophisticated. While the expectations of such investors are endogenously determined in equilibrium, these are based on a coarse understanding of the market dynamics. We highlight how such investors may endogenously switch from euphoria to panic and how this may lead to equilibrium bubbles and crashes even in a purely speculative market in which information is complete and it is commonly understood that the bubble cannot grow forever. We also show how this setting can match stylized empirical facts, and we investigate whether bubbles may last longer when the share of fully rational traders increases.

Keywords: bounded rationality; crashes; Speculative bubbles (search for similar items in EconPapers)
Date: 2025-12
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Published in Mathematics and Financial Economics, 2025, 19, pp.735-755. ⟨10.1007/s11579-025-00402-5⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-05368510

DOI: 10.1007/s11579-025-00402-5

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