Abstract
In this chapter, the contribution of convention theory to the understanding of stock market bubbles and crashes is analyzed. In contrast with neoclassical and behaviorist conceptions of finance that share the same objectivity of values hypothesis, convention theory assumes that, in a situation of radical uncertainty, the objective value does not exist. Value is the result of a social construct, based on collective beliefs, historically and spatially located. The prices formed on the markets then only translate conjectures about the future, scenarios among others, unstable by nature because they are based on fickle opinions. Therefore, the phenomena of financial bubbles cannot be thought of as irrational episodes characterized by an accidental misalignment between price and intrinsic value. They are the result of a polarization of collective beliefs around a common representation of the future, which is called a dominant valuation convention. Similarly, a stock market crisis can no longer be analyzed as a speculative bubble that has suddenly burst and the return to true values, but as a bifurcation of the collective belief, i.e., a reversal of the dominant valuation convention.
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Bourghelle, D. (2023). Convention Theory as an Approach to Financial Bubbles and Crashes. In: Diaz-Bone, R., Larquier, G.d. (eds) Handbook of Economics and Sociology of Conventions. Springer, Cham. https://doi.org/10.1007/978-3-030-52130-1_60-1
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