The eminent financial economist Eugene F. Fama does
not believe that security prices exhibit price bubbles,
which he defines in his Nobel Lecture as an “irrational
strong price increase that implies a predictable strong decline” (Fama, 2014, p. 1475). He calls the term “treacherous.“ Fama’s argument, in essence, is that if one looks
at stocks or portfolios that have gone up substantially in
price, then, going forward, returns on average are not unusually low. Fama’s conclusion runs contrary to a long literature studying bubbles historically (e.g., Mackay, 1841;
Galbraith, 1954; Kindleberger, 1978; Shiller, 2000), as well
as many modern theoretical, empirical, and experimental
investigations. But is it correct?