Question

What does Thaler say that he would do if he were in charge of the Federal Reserve and spotted scenarios like Scottsdale and Las Vegas occurring in the market?

Answer 1

According to Richard Thaler; there is an aspect that whether the markets are efficient ? This aspect explains the above asked question as follows;

Efficient market hypothesis and how good working model it is?

According to Thaler he distinguishes two aspects of it. One is whether you can beat the market and the other is whether the prices are correct. Thaler says tha if for the first part we can beat the market then we are in virtually complete agreement.

According to Thaler he had two examples to explain bubbles. The first is house prices . For long period house prices were roughly 20 times rental price . Then starting around 2000 they went up a lot , then they went back down affer the financial crisis.

Thaler thereafter explained tgat its impossible to know for sure if there's something a bubble. What do we kniw is that in the markets such as Las Vegas and Scottsdale where prices were going up the most, expectations of future price appericiarion were also the highest. That coukd be rational but Thaler was spectikal about it,