Greater fool theory

Greater fool theory,

Definition of Greater fool theory:

  1. Observation that any price (no matter how unrealistic) can be justified if a buyer believes that there is another buyer who will pay an even-higher price for the same item. This line of thinking causes and fuels stockmarket and commodity market booms and manias which, in due course, lead to busts and paranoias.

  2. The greater fool theory states that it is possible to make money by buying securities, whether or not they are overvalued, by selling them for a profit at a later date. This is because there will always be someone (i.e. a bigger or greater fool) who is willing to pay a higher price.

  3. If acting in accordance with the greater fool theory, an investor will purchase questionably priced securities without any regard to their quality. If the theory holds, the investor will still be able to quickly sell them off to another “greater fool,” who could also be hoping to flip them quickly. Unfortunately, speculative bubbles burst eventually, leading to a rapid depreciation in share prices.

How to use Greater fool theory in a sentence?

  1. The greater fool theory states that you can make money from securities, whether they are overvalued or not, by selling them to a gullible investor or a greater fool.
  2. Due diligence is recommended as a strategy to avoid becoming a greater fool.

Meaning of Greater fool theory & Greater fool theory Definition