Are Bubbles Efficient? Many investors purchased absurdly
overvalued stocks during the late '90s and have since suffered
devastating losses. The explanation now given for this is that
the stock market was in a "bubble" which has burst, but those
buying stocks at the time were not able to identify the bubble.
What is clear in retrospect was a controversial proposition at
the time. Many individual investors justified their own
purchases of stocks at inflated values by the naïve belief that
stocks at current prices are always a good investment. Their
prices have been set in a competitive market and returns from
the ownership of stocks will always be in line with historical
averages, so the thinking goes. Individual investors could find
intellectual support for their view in a 1999 speech by Fed
governor Alan Greenspan. In this speech, he argued that a stock
market bubble could not be distinguished (until after it had
burst) from a rise in prices of stocks due to improvements in
fundamentals: To anticipate a bubbl