Article

Bubbles and Crashes with Partially Sophisticated Investors

Milo Bianchi, and Philippe Jehiel

Abstract

We analyze bubbles and crashes in a model in which some investors are partially sophisticated. While the expectations of such investors are endogenously determined in equilibrium, these are based on a coarse understanding of the market dynamics. We highlight how such investors may endogenously switch from euphoria to panic and how this may lead to equilibrium bubbles and crashes even in a purely speculative market in which information is complete and it is commonly understood that the bubble cannot grow forever. We also show how this setting can match stylized empirical facts, and we investigate whether bubbles may last longer when the share of fully rational traders increases.

Keywords

Speculative bubbles; crashes; bounded rationality.;

Reference

Milo Bianchi, and Philippe Jehiel, Bubbles and Crashes with Partially Sophisticated Investors, Mathematics and Financial Economics, September 2025, forthcoming.

See also

Published in

Mathematics and Financial Economics, September 2025, forthcoming