Bubbles and Crashes with Partially Sophisticated Investors

Milo Bianchi and Philippe Jehiel

No 25-1668, TSE Working Papers from Toulouse School of Economics (TSE)

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: Speculative bubbles; crashes; bounded rationality. (search for similar items in EconPapers)
JEL-codes: C72 D84 G12 (search for similar items in EconPapers)
Date: 2025-09
New Economics Papers: this item is included in nep-mic
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Related works:
Working Paper: Bubbles and Crashes with Partially Sophisticated Investors (2010)
Working Paper: Bubbles and crashes with partially sophisticated investors (2008)
Working Paper: Bubbles and crashes with partially sophisticated investors (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:131050

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