Greater Fool Theory

The Greater Fool Theory suggests that investors can profit from buying overvalued assets by selling them to someone else (the “greater fool”) at a higher price, regardless of the asset’s intrinsic value. This theory often drives speculative bubbles, where asset prices rise far above their fundamental value due to the belief that someone else will pay even more. The theory underscores the risk of buying based on market sentiment rather than sound investment analysis.

Example

During the dot-com bubble, many investors bought tech stocks at inflated prices, believing they could sell them to others for a profit, illustrating the Greater Fool Theory in action.