Speculative Prices and Popular Models

Abstract

The key idea of rational expectations models is to assume that people know (or behave as if they know) the true model that describes the economy. However, popular economic models (the models that are used by the broad masses of economic actors to form their expectations) are obviously not the same as those held by economists. This paper reports on data collection effort on popular models, using questionnaire survey methods, with the purpose of understanding speculative markets. I will report here on my research to understand the U.S. stock market crash of October 1987; research Fumiko Konya, Yoshiro Tsutsui, and I undertook to understand the Japanese stock market crash of October 1987; research Karl Case and I undertook to understand recent real estate booms; and research John Pound and I undertook to understand the periodic “hot” markets for initial public offerings (IPO's) of common stock.