The greater fool theory is an economic theory. The theory states that the prices of objects aren’t determined by simply its fundamental value but instead by the belief of being able to oversell that object later.
A Greater Fool, therefore, is someone who believes that they can buy an overvalued asset and then sell it to someone else who will buy it at a greater price. The logic follows that there will always be a greater fool to buy it at that higher valuation. Because the market is so affected by beliefs and expectations of market participants within it, the actual worth of the object
We see this theory especially with things such as market bubbles. This rise in object valuation cannot last forever, so the ‘bubble’ that formed based on these rising prices eventually bursts. For example, with the 2008 financial crisis saw the use of subprime mortgages but eventually, the cost of housing was too high and the banks had a large amount of credit that had been given to these homeowners that couldn’t be paid. This led to the housing bubble popping and played part in the recession.
Be the greater fool
So many websites and investors will try to warn against the Greater Fool way of trading. That it is better to diversify your portfolio and go with value stocks. And fisically speaking, I tend to agree. But what I want to talk about is the lofty idea behind the theory and how it connects to everyday life. To no one’s surprise, I’m going to quote my favorite television show The Newsroom.
“The ‘Greater Fool’ is actually an economic term. It’s a patsy. For the rest of us to profit, we need a greater fool, someone who will buy long and sell short. Most people spend their lives trying not to be the greater fool. We toss him the hot potato. We dive for his seat when the music stops. The greater fool is someone with the perfect blend of self-delusion and ego to think that he can succeed where others have failed. This whole country was made by greater fools.”
I am forever idealistic when it comes to the idea of perseverance and sometimes being a little gutsy. The founding fathers were terribly Greater Fool-esque when you think about it. To have enough gumption and self-belief to think you’d be better off creating a whole new system of government and leaving your ruler is pretty self-delusion if you ask me. And as according to the theory, sometimes these intrepid decisions fail and you are left picking up the pieces. But also, the most inspiring and hopeful stories are those who succeeded despite evidence that they should fail. Like the quote said, our country was founded on Greater Fools. All I know is that I believe that I can succed where others have failed and that I too, am a Greater Fool.