Skip to main content Accessibility help
Hostname: page-component-848d4c4894-tn8tq Total loading time: 0 Render date: 2024-06-19T21:19:30.220Z Has data issue: false hasContentIssue false

24 - Bubbles, Crises, and Heterogeneous Beliefs


Published online by Cambridge University Press:  05 June 2013

Wei Xiong
Princeton University
Jean-Pierre Fouque
University of California, Santa Barbara
Joseph A. Langsam
University of Maryland, College Park
Get access


Abstract Heterogeneous beliefs are a widely observed attribute of individuals. This chapter reviews the quickly growing literature that builds on heterogeneous beliefs to explain bubbles, crises, and endogenous risk in financial markets.

The history of financial markets has been dotted with episodes of bubbles, during which market values of assets vastly exceeded reasonable assessments of their fundamental value. Asset price bubbles can lead to severe economic consequences ranging from wasteful over-investment and frenzied trading during booms to devastating financial crises and depressed real economies during busts. Economists have emphasized many aspects of bubbles and crises. Minsky (1974) advocated the view that excessive expansion of bank credit due to optimism can fuel a speculative euphoria and slowly lead the economy to a crisis. Kindleberger (1978) stressed that irrationally optimistic expectations frequently emerge among investors in the late stages of major economic booms and lead firm managers to over-invest, overpromise, and over-leverage, which sow the seeds for an eventual collapse after they fail to deliver on their promises. Shiller (2000) highlighted a host of psychological biases people use in forming a feedback mechanism, through which initial price increases caused by certain initial precipitating factors such as new technology innovations feed back into even higher asset prices through increased investor confidence and expectations. Allen and Gale (2007) focused on agency problems of professional managers who actively seek unwarranted risk, which leads to bubbles and crises.

Publisher: Cambridge University Press
Print publication year: 2013

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


Abreu, Dilip and Markus K., Brunnermeier (2002). Synchronization risk and delayed arbitrage. Journal of Financial Economics 66 341–360.CrossRefGoogle Scholar
Abreu, Dilip and Markus K., Brunnermeier (2003). Bubbles and crashes. Econometrica 71 173–204.CrossRefGoogle Scholar
Acemoglu, Daron, Victor, Chernozhukov, and Muhamet, Yildiz (2009). Fragility of asymptotic agreement under Bayesian learning, Working paper, MIT.
Ackert, Lucy, Narat, Charupat, Bryan, Church, and Richard, Deaves (2006). Margin, short selling, and lotteries in experimental asset markets. Southern Economic Journal 73 419–36.CrossRefGoogle Scholar
Adrian, Tobias and Hyun Song, Shin (2010). Liquidity and leverage. Journal of Financial Intermediation 19 418–437.CrossRefGoogle Scholar
Ait-Sahalia, Yacine and Andrew, Lo (1998). Nonparametric estimation of state–price densities implicit in financial asset prices. Journal of Finance 53 499–547.CrossRefGoogle Scholar
Allen, Franklin and Douglas, Gale (2000). Bubbles and crises. Economic Journal 110 236–55.CrossRefGoogle Scholar
Allen, Franklin and Douglas, Gale (2007). Understanding Financial Crises. Oxford University Press, New York.Google Scholar
Allen, Franklin and Gary, Gorton (1993). Churning bubbles. Review of Economic Studies 60 813–36.CrossRefGoogle Scholar
Alpert, M. and H., Raiffa (1982). A progress report on the training of probability assessors. In Judgement Under Uncertainty: Heuristics and Biases, Daniel, Kahneman, Paul, Slovic, and Amos, Tversky, (eds). Cambridge University Press, Cambridge.Google Scholar
Anderson, Evan, Eric, Ghysels, and Jennifer, Juergens (2005). Do heterogeneous beliefs matter for asset pricing?Review of Financial Studies 18 875–924.CrossRefGoogle Scholar
Aumann, Robert (1976). Agreeing to disagreeAnnals of Statistics 4 1236–1239.CrossRefGoogle Scholar
Baker, Malcolm, Jeremy, Stein, and Jeffrey, Wurgler (2003). When does the market matter? Stock prices and the investment of equity-dependent firms. Quarterly Journal of Economics 118 969–1006.CrossRefGoogle Scholar
Banerjee, Snehal (2011). Learning from prices and the dispersion in beliefs. Review of Financial Studies 24 3025–3068.CrossRefGoogle Scholar
Barber, Brad and Terrance, Odean (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. Journal of Finance 55 773–806.CrossRefGoogle Scholar
Barber, Brad, Yi-Tsung, Lee, Yu-Jane, Liu, and Terrance, Odean (2009). Just how much do individual investors lose by trading?Review of Financial Studies 22 609–632.CrossRefGoogle Scholar
Barberis, Nicholas (2011). Psychology and the financial crisis of 2007–2008. Working paper, Yale University.Google Scholar
Barberis, Nicholas, Andrei, Shleifer, and Robert, Vishny (1998). A model of investor sentiment. Journal of Financial Economics 49 307–343.Google Scholar
Barberis, Nicholas and Richard, Thaler (2003). A survey of behavioral finance. In Handbook of the Economics of Finance, Constantinides, G., Harris, M., Stulz, R. (eds). North-Holland, Amsterdam.Google Scholar
Basak, Suleyman (2000). A model of dynamic equilibrium asset pricing with heterogeneous beliefs and extraneous risk. Journal of Economic Dynamics and Control 24 63–95.CrossRefGoogle Scholar
Bebchuk, Lucian and Jesse, Fried (2004). Pay Without Performance: The Unfulfilled Promise of Executive Compensation. Harvard University Press, MA.Google Scholar
Ben David, Itzhak, John, Graham, and Campbell, Harvey (2010). Managerial Miscalibration. NBER working paper 16215.
Benabou, Roland (2009). Groupthink: Collective delusions in organizations and markets. Working paper, Princeton University.CrossRefGoogle Scholar
Blanchard, Oliver, Changyong, Rhee, and Lawrence, Summers (1993). The stock market, profit and investment. Quarterly Journal of Economics 107 115–136.Google Scholar
Blanchard, Olivier and Mark, Watson (1983). Bubbles, rational expectations and financial markets. National Bureau of Economic Research, NBER Working Papers 945.
Blume, Lawrence and David, Easley (1992). Evolution and market behavior. Journal of Economic Theory 58 9–40.CrossRefGoogle Scholar
Blume, Lawrence and David, Easley (2006). If you're so smart, why aren't you rich? Belief selection in complete and incomplete markets. Econometrica 74 929–966.CrossRefGoogle Scholar
Bolton, Patrick, Jose, Scheinkman, and Tano, Santos (2011). Outside and inside liquidity. Quarterly Journal of Economics 126 259–321.CrossRefGoogle Scholar
Bolton, Patrick, Jose, Scheinkman, and Wei, Xiong (2005). Pay for short-term performance: Executive compensation in speculative markets. Journal of Corporation Law 30 721–747.Google Scholar
Bolton, Patrick, Jose, Scheinkman, and Wei, Xiong (2006). Executive compensation and short-termist behavior in speculative markets. Review of Economic Studies 73 577–610.CrossRefGoogle Scholar
Bris, Arturo, William, Goetzmann, and Ning, Zhu (2007). Efficiency and the bear: Short sales and markets around the world. Journal of Finance 62 1029–1079.CrossRefGoogle Scholar
Brunnermeier, Markus and Lasse, Pedersen (2009). Funding liquidity and market liquidity. Review of Financial Studies 22 2201–2238.CrossRefGoogle Scholar
Brunnermeier, Markus, Alp, Simsek and Wei, Xiong (2012). A welfare criterion for models with distorted beliefs. Working paper, Princeton University.Google Scholar
Buraschi, Andrea and Alexei, Jiltsov (2006). Model uncertainty and option markets with heterogeneous beliefs. Journal of Finance 61 2841–97.CrossRefGoogle Scholar
Campbell, John, Andrew, Lo, and Craig, MacKinlay (1997). The Econometrics of Financial Markets. Princeton University Press, NJ.Google Scholar
Cao, Dan (2011). Collateral shortages, asset price and investment volatility with heterogeneous beliefs. Working paper, Georgetown University.Google Scholar
Chen, Hui, Scott, Joslin, and Ngoc-Khanh, Tran (2011). Rare disasters and risk sharing with heterogeneous beliefs. Working paper, MIT.CrossRef
Chen, Joseph, Harrison, Hong, and Jeremy, Stein (2002). Breadth of ownership and stock returns. Journal of Financial Economics 66 171–205.CrossRefGoogle Scholar
Cheng, Ing-haw, Sahil, Raina, and Wei, Xiong (2012). Wall Street and the housing bubble: Bad incentives, bad models, or bad luck? Working paper, Princeton University.Google Scholar
Chinco, Alex and Chris, Mayer (2011). Noise traders, distant speculators and asset bubbles in the housing market. Working paper, Columbia University.Google Scholar
Constantinides, George and Darrell, Duffie (1996). Asset pricing with heterogeneous consumers. Journal of Financial Economics 104 219–240.Google Scholar
Coval, Joshua and Erik, Stafford (2007). Asset fire sales (and purchases) in equity markets. Journal of Financial Economics 86, 479–512.CrossRefGoogle Scholar
Croitoru, Benjamin and Lei, Lu (2009). Asset pricing in a monetary economy with heterogeneous belief. Working paper, McGill University.Google Scholar
Danielsson, Jon, Jean-Pierre, Zigrand, and Hyun Song, Shin (2010). Balance sheet capacity and endogenous risk. Working paper, London School of Economics and Princeton University.Google Scholar
Daniel, Kent, David, Hirshleifer, and A., Subrahmanyam (1998). Investor psychology and security market under- and over-reactions. Journal of Finance 53 1839–1885.CrossRefGoogle Scholar
David, Alexander (2008). Heterogeneous beliefs, speculation, and the equity premium. Journal of Finance 63 41–83.CrossRefGoogle Scholar
D'Avolio, Gene (2002). The market for borrowing stock. Journal of Financial Economics 66 271–306.Google Scholar
Diether, Karl, Christopher, Malloy, and Anna, Scherbina (2002). Differences of opinion and the cross section of stock returns. Journal of Finance 57 2113–2141.CrossRefGoogle Scholar
De Long, Brad, Andrei, Shleifer, Lawrence, Summers, and Robert, Waldman (1990). Noise trader risk in financial market. Journal of Political Economy 98 703–738.CrossRefGoogle Scholar
De Long, Brad, Andrei, Shleifer, Lawrence, Summers, and Robert, Waldman (1991). The survival of noise traders in financial markets. Journal of Business 64 1–19.Google Scholar
Detemple, Jerome and Shashidhar, Murthy (1994). Intertemporal asset pricing with heterogeneous beliefs. Journal of Economic Theory 62 294–320.CrossRefGoogle Scholar
Dieckmann, Stephan (2011). Rare event risk and heterogeneous beliefs: The case of incomplete markets. Journal of Financial and Quantitative Analysis 46 459–488.CrossRefGoogle Scholar
Duffie, Darrel (2010). Asset price dynamics with slow-moving capital, (American Finance Association Presidential Address). Journal of Finance 65 1237–1267.CrossRefGoogle Scholar
Duffie, Darrell, Nicolae, Garleanu, and Lasse Heje, Pedersen (2002). Securities lending, shorting, and pricing. Journal of Financial Economics 66 307–339.CrossRefGoogle Scholar
Duffie, Darrel, Nicolae, Garleanu, and Lasse Heje, Pedersen (2005). Over-the-counter markets. Econometrica 73 1815–1847.CrossRefGoogle Scholar
Dufwenberg, Martin, Tobias, Lindqvist, and Evan, Moore (2005). Bubbles and experience: An experiment on speculation. American Economic Review 95 1731–1737.CrossRefGoogle Scholar
Dumas, Bernard, Alexander, Kurshev, and Raman, Uppal (2009). Equilibrium portfolio strategies in the presence of sentiment risk and excess volatility. Journal of Finance 64 579–629.CrossRefGoogle Scholar
Dumas, Bernard, Karen, Lewis, and Emilio, Osambela (2011). Differences of opinion and international equity markets. Working paper, Wharton School.CrossRefGoogle Scholar
Fostel, Ana and John, Geanakoplos (2008). Leverage cycles and the anxious economy. American Economic Review 98 1211–1244.CrossRefGoogle Scholar
Friedman, Milton (1953). Essays in Positive Economics. University of Chicago Press, Chicago, IL.Google Scholar
Froot, Kenneth and Paul, O'Connell (1999). The pricing of US catastrophe reinsurance. In The Financing of Catastrophe Risk, Kenneth, Froot (ed). University of Chicago Press, Chicago, IL.CrossRefGoogle Scholar
Galbraith, John Kenneth (1997). The Great Crash 1929. Houghton Mifflin Company, New York.Google Scholar
Gallmeyer, Michael and Burton, Hollifield (2008). An examination of heterogeneous beliefs with a short-sale constraint in a dynamic economy. Review of Finance 12 323–364.Google Scholar
Garber, Peter (2000). Famous First Bubbles: The Fundamentals of Early Manias. MIT Press, Cambridge, Mass.Google Scholar
Garleanu, Nicolae and Lasse, Pedersen (2011). Margin-based asset pricing and deviations from the law of one price. Review of Financial Studies 24 1980–2022.CrossRefGoogle Scholar
Geanakoplos, John (2003), Liquidity, default, and crashes: Endogenous contracts in general equilibrium, In Advances in Economics and Econometrics Theory and Applications, Eighth World Conference, Vol 2. Econometric Society Monographs, pp. 170–205.Google Scholar
Geanakoplos, John (2010). The leverage cycle. NBER Macroeconomics Annual 2009. 24 1–65.Google Scholar
Geczy, Christopher, David, Musto, and Adam, Reed (2002). Stocks are special too: an analysis of the equity lending market. Journal of Financial Economics 66 241–269.CrossRefGoogle Scholar
Gervais, Simon, and Terrance, Odean (2001). Learning to be overconfident. Review of Financial Studies 14 1–27.CrossRefGoogle Scholar
Gilchrist, Simon, Charles, Himmelberg, and Gur, Huberman (2005). Do stock price bubbles influence corporate investment?Journal of Monetary Economics 52 805–827.CrossRefGoogle Scholar
Grinblatt, Mark and Matti, Keloharju (2000). The investment behavior and performance of various investor types: a study of Finland's unique data set. Journal of Finance 55 43–67.Google Scholar
Griffin, D. and A., Tversky (1992). The weighing of evidence and the determinants of overconfidence. Cognitive Psychology 24 411–435.CrossRefGoogle Scholar
Gromb, Denis and Dimitri, Vayanos (2002). Equilibrium and welfare in markets with financially constrained arbitrageurs. Journal of Financial Economics 66 361–407.CrossRefGoogle Scholar
Gromb, Denis and Dimitri, Vayanos (2010). Limits of arbitrage: The state of the theory. Annual Review of Financial Economics 2 251–275.CrossRefGoogle Scholar
Grossman, Sanford and Joseph, Stiglitz (1980). On the impossibility of informationally efficient markets. American Economic Review 70 393–408.Google Scholar
Harris, Milton and Artur, Raviv (1993). Differences of opinion make a horse race. Review of Financial Studies 6 473–506CrossRefGoogle Scholar
Harrison, Michael, and David M., Kreps (1978). Speculative investor behavior in a stock-market with heterogeneous expectations. Quarterly Journal of Economics 92 323–336.CrossRefGoogle Scholar
Haruvy, Ernan and Charles, Noussair (2006). The effect of short selling on bubbles and crashes in experimental spot asset markets. Journal of Finance 61 1119–1157.CrossRefGoogle Scholar
Haruvy, Ernan, Yaron, Lahav, and Charles, Noussair (2007). Traders' expectations in asset markets: experimental evidence. American Economic Review 97 1901–1920.CrossRefGoogle Scholar
Haughwout, Andrew, Donghoon, Lee, Joseph, Tracy, and Wilbert, van der Klaauw (2011). Real estate investors, the leverage cycle and the housing market crisis. Federal Reserve Bank of New York, Staff Reports, no. 514, September 2011. Available at Scholar
He, Zhiguo and Arvind, Krishnamurthy (2009). Intermediary asset pricing. Working paper, University of Chicago and Northwestern University.Google Scholar
He, Zhiguo and Wei, Xiong (2010). Delegated asset management and investment mandates. Working paper, University of Chicago and Princeton University.Google Scholar
He, Zhiguo and Wei, Xiong (2012). Debt financing in asset markets. American Economic Review Papers and Proceedings 102 88–94.CrossRefGoogle Scholar
Hirota, Shinichi, and Shyam, Sunder (2007). Price bubbles sans dividend anchors: Evidence from laboratory stock markets. Journal of Economic Dynamics and Control 31 1875–1909.CrossRefGoogle Scholar
Hirshleifer, David (2001). Investor psychology and asset pricing. Journal of Finance 56 1533–1597.CrossRefGoogle Scholar
Hong, Harrison and Jeffrey, Kubik (2003). Analyzing the analysts: Career concerns and biased earnings forecasts. Journal of Finance 58 313–351.CrossRefGoogle Scholar
Hong, Harrison, Jose, Scheinkman, and Wei, Xiong (2006). Asset float and speculative bubbles. Journal of Finance 61 1073–1117.CrossRefGoogle Scholar
Hong, Harrison and Jeremy, Stein (2003). Differences of opinion, short-sales constraints, and market crashes. Review of Financial Studies 16 487–525.CrossRefGoogle Scholar
Hong, Harrison and Jeremy, Stein (2007). Disagreement and the stock market. Journal of Economic Perspectives 21 109–128.CrossRefGoogle Scholar
Hong, Harrison and David, Sraer (2011). Quiet bubbles. Working paper, Princeton University.Google Scholar
Hussam, Reshmaan, David, Porter, and Vernon, Smith (2008). Thar she blows: Can bubbles be rekindled with experienced subjects?American Economic Review 98 924–937.CrossRefGoogle Scholar
Jarrow, Robert (1980). Heterogeneous expectations, restrictions on short-sales, and equilibrium asset prices. Journal of Finance 35 1105–1113.CrossRefGoogle Scholar
Jouini, Elyes and Clotilde, Napp (2007). Consensus consumer and intertemporal asset pricing with heterogeneous beliefs. Review of Economic Studies 74 1149–1174.CrossRefGoogle Scholar
Kandel, Eugene and Neil, Pearson (1995). Differential interpretation of public signals and trade in speculative markets. Journal of Political Economy 103 831–872.CrossRefGoogle Scholar
Kindleberger, Charles (1978). Manias, Panics, and Crashes: A History of Financial Crises. John Wiley and Sons, New York.CrossRefGoogle Scholar
Kiyotaki, Nobu and John, Moore (1997). Credit cycles. Journal of Political Economy 105 211–248.CrossRefGoogle Scholar
Kondor, Peter (2009). Risk in dynamic arbitrage: The price effects of convergence trading. Journal of Finance 64 631–655.CrossRefGoogle Scholar
Kogan, Leonid, Stephen, Ross, Jiang, Wang, and Mark, Westerfield (2006). The price impact and survival of irrational traders. Journal of Finance 61 195–229.CrossRefGoogle Scholar
Kogan, Leonid, Stephen, Ross, Jiang, Wang, and Mark, Westerfield (2011). Market selection. Working paper, MIT.Google Scholar
Krishnamurthy, Arvind (2009). Amplification mechanisms in liquidity crises. American Economic Journals – Macroeconomics 2 1–33.Google Scholar
Kurz, Mordecai (1994). On the structure and diversity of rational beliefs. Economic Theory 4 877–900.CrossRefGoogle Scholar
Kurz, Mordecai (1996). Rational beliefs and endogenous uncertainty, Economic Theory 8 383–397.CrossRefGoogle Scholar
Kyle, Albert (1985). Continuous auctions and insider trading, Econometrica 53 1315–1335.CrossRefGoogle Scholar
Kyle, Albert and Albert, Wang (1997). Speculation duopoly with agreement to disagree: Can overconfidence survive the market test?Journal of Finance 52 2073–90.CrossRefGoogle Scholar
Kyle, Albert and Wei, Xiong (2001). Contagion as a wealth effect. Journal of Finance 56 1401–1440.CrossRefGoogle Scholar
Lamont, Own and Richard, Thaler (2003). Can the market add and subtract? Mispricing in tech stock carve-outs. Journal of Political Economy 111 227–268.CrossRefGoogle Scholar
Lei, Vivian, Charles, Noussair, and Charles, Plott (2001). Non-speculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs. actual irrationality, Econometrica 69 830–859.CrossRefGoogle Scholar
Lin, H. and M., McNichols (1998). Underwriting relationships, analysts' earnings forecasts and investment recommendations. Journal of Accounting and Economics 25 101–127.CrossRefGoogle Scholar
Mackay, Charles (1841). Extraordinary Popular Delusions and the Madness of CrowdsOffice of the National Illustrated Library, London.Google Scholar
Malmendier, Ulrike and D., Shantikumar (2007). Are investors naive about incentives?Journal of Financial Economics 85 457–489.CrossRefGoogle Scholar
Mankiw, Gregory, Ricardo, Reis, and Justin, Wolfers (2004). Disagreement about inflation expectations, NBER Macroeconomics Annual 2003 18 209–248.Google Scholar
Mei, Jianping, Jose, Scheinkman, and Wei, Xiong (2009). Speculative trading and stock prices: Evidence from Chinese A–B share premia. Annals of Economics and Finance 10 225–255.Google Scholar
Mian, Atif and Amir, Sufi (2009). The consequences of mortgage credit expansion: Evidence from the US mortgage default crisis. Quarterly Journal of Economics 124 1449–1496.CrossRefGoogle Scholar
Milgrom, Paul and Nancy, Stokey (1982). Information, trade and common knowledge. Journal of Economic Theory 26 17–27.CrossRefGoogle Scholar
Miller, Edward (1977). Risk, uncertainty and divergence of opinion. Journal of Finance 32 1151–1168.CrossRefGoogle Scholar
Minsky, Hyman (1974). The modeling of financial instability: An introduction. In Proceedings of the Fifth Annual Pittsburgh Conference, Modeling and Simulation 5 267–272.Google Scholar
Mitchell, Mark, Lasse Heje, Pedersen and Todd, Pulvino (2007). Slow moving capital. American Economic Review 97 215–220.CrossRefGoogle Scholar
Morck, Randall, Andrei, Shleifer and Robert, Vishny (1990). The stock market and investment: Is the market a sideshow?Brookings Papers on Economic Activity 2 157–215.Google Scholar
Morris, Stephen (1995). The common prior assumption in economic theory, Economics and Philosophy 11 227–253.CrossRefGoogle Scholar
Morris, Stephen (1996). Speculative investor behavior and learning. Quarterly Journal of Economics 111 1111–1133.CrossRefGoogle Scholar
Odean, Terrance (1998). Volume, volatility, price, and profit when all traders are above average. Journal of Finance 53 1887–1934.CrossRefGoogle Scholar
Odean, Terrance (1999). Do investors trade too much?American Economic Review 89 1279–1298.CrossRefGoogle Scholar
Ofek, Eli and Matthew, Richardson (2003). DotCom Mania: The rise and fall of Internet stock prices. Journal of Finance 58 1113–1137.CrossRefGoogle Scholar
Panageas, Stavros (2006). The neoclassical q theory of investment in speculative markets. Working paper, University of Chicago.Google Scholar
Pastor, Lubos, and Pietro, Veronesi (2006). Was there a NASDAQ bubble in the late 1990s?Journal of Financial Economics 81 61–100.CrossRefGoogle Scholar
Pastor, Lubos, and Pietro, Veronesi (2009). Learning in financial markets. Annual Review of Financial Economics 1 361–381.CrossRefGoogle Scholar
Polk, Christopher and Paola, Sapienza (2009). The stock market and corporate investment: A test of catering theory. Review of Financial Studies 22 187–217.CrossRefGoogle Scholar
Porter, David, and Vernon, Smith (1995). Futures contracting and dividend uncertainty in experimental asset markets. Journal of Business 68 509–541.Google Scholar
Rajan, Raghuram (2010). Fault Lines. Princeton University Press, Princeton NJ.Google Scholar
Reinhart, Carmen and Kenneth, Rogoff (2009). This Time Is Different. Princeton University Press, Princeton NJ.Google Scholar
Rosenberg, Joshua and Robert, Engle (2002). Empirical pricing kernels. Journal of Financial Economics 64 341–372.CrossRefGoogle Scholar
Rothschild, Michael (1974). A two-armed bandit theory of market pricing. Journal of Economic Theory 9 185–202.CrossRefGoogle Scholar
Sandroni, Alvaro (2000). Do markets favor agents able to make accurate predictions?Econometrica 68 1303–1342.CrossRefGoogle Scholar
Savage, L. J. (1954). The Foundation of Statistics. John Wiley and Sons, New York.Google Scholar
Scheinkman, Jose A., and Wei, Xiong (2003). Overconfidence and speculative bubbles. Journal of Political Economy 111 1183–1219.CrossRefGoogle Scholar
Sebenius, James and John, Geanakoplos (1983). Don't bet on it: Contingent agreements with asymmetric information. Journal of the American Statistical Association 78 424–426.CrossRefGoogle Scholar
Shefrin, Hersh (2008). A Behavioral Approach to Asset Pricing. Academic Press.Google Scholar
Shen, Ji, Hongjun, Yan, and Jinfan, Zhang (2011). Collateral-motivated financial innovation. Working paper, Yale University.Google Scholar
Shiller, Robert (1998). Macro Markets. Oxford University Press, New York.CrossRefGoogle Scholar
Shiller, Robert (2000). Irrational Exuberance. Princeton University Press, Princeton, NJ.Google Scholar
Shleifer, Andrei and Robert, Vishny (1997). Limits of arbitrage. Journal of Finance 52 35–55.CrossRefGoogle Scholar
Sims, Christopher (2008). Inflation expectations, uncertainty, and monetary policy. Working paper, Princeton University.Google Scholar
Simsek, Alp (2010). Belief disagreements and collateral constraints. Working paper, Harvard University.Google Scholar
Simsek, Alp (2011). Speculation and risk sharing with new financial assets. Working paper, Harvard University.CrossRefGoogle Scholar
Smith, Vernon L., Gerry L., Suchanek, and Arlington W., Williams (1988). Bubbles, crashes, and endogenous expectations in experimental spot asset markets, Econometrica 56 1119–1151.CrossRefGoogle Scholar
Stein, Jeremy (1996). Rational capital budgeting in an irrational world. Journal of Business 69 429–455.Google Scholar
Welch, Ivo (2000). Views of financial economists on the equity premium and on professional controversies. Journal of Business 73 501–537.Google Scholar
White, Eugene (1990). The stock market boom and crash of 1929 revisited. Journal of Economic Perspectives 4 67–83.CrossRefGoogle Scholar
Xiong, Wei (2001). Convergence trading with wealth effects: An amplification mechanism in financial markets. Journal of Financial Economics 62 247–292.CrossRefGoogle Scholar
Xiong, Wei and Hongjun, Yan (2010). Heterogeneous expectations and bond markets. Review of Financial Studies 23 1433–1466.CrossRefGoogle Scholar
Xiong, Wei and Jialin, Yu (2011). The Chinese warrants bubble. American Economic Review 101 2723–2753.CrossRefGoogle Scholar
Yan, Hongjun (2008). Natural selection in financial markets: Does it work?Management Science 54 1935–1950.CrossRefGoogle Scholar
Yu, Jialin (2011). Disagreement and return predictability of stock portfolios. Journal of Financial Economics 99 162–183.CrossRefGoogle Scholar
Zapatero, Fernando (1998). Effects of financial innovations on market volatility when beliefs are heterogeneous. Journal of Economic Dynamics and Control 22 597–626.CrossRefGoogle Scholar

Save book to Kindle

To save this book to your Kindle, first ensure is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the or variations. ‘’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats