What is the theory of a bigger fool?

Theory of greater fool is the belief that the purchase of security or land with real estate at a disproportionately high price should still be able to return profit, even if it can be overvalued. The reason why it can work is that someone will always be willing to buy shares for more than the first investor for it. So there is always a larger "fool", although the value for the item is not really there. Bubbles create artificial value and usually happen around supplies or real estate. As long as investors are in the purchase of madness, they are willing to overpay for security or assets. So until the sale occurs when this frantic purchase takes place, the theory of a larger fool works as mentioned. Thus, shares and properties that are extremely overvalued will see their Decline value much faster than those they are not. This could lead to significant problems for an investor who was more fools depending on the theory to save him from a number of bad investments. Once the market bubble bursts, there is no safetyCentral and potential of catastrophic loss will become very real. This is often referred to as "correction".

The only investor or even a small minority of investors affecting the theory of larger fools is not a big problem for the economy. Every single investor, no matter how big, should be difficult to influence the market. There is just too much money in the system to think that its losses will depend on the overall picture.

The problem occurs when many investors decide to buy larger fools at the same time. For the theory to actually work, even for a short time, that is what must take place. These investors who invest together in unhealthy shares can all experience considerable losses. This could be enough for some to cause some to reconsider their purchase strategy, which in the long run can be a good thing. But in the short term it can be kaTastrophic, causing a slowdown of purchase and market accident.

While the theory of a larger fool has the potential to make a man very rich, pay for something more than worth it is always risky. In the end, someone must be left to keep his worthless property. It relies regularly on theory means that there is a potential to gamble to catch up with every investor. Avoiding such a loss would require a lot of happiness on a long track.