But to gain wide acceptance, extrapolative expectations will have to overcome years of entrenched convention in the economics profession. The near-ban on using anything other than rational expectations is still very strong. In the hunt for truth, sociology is often the greatest barrier.The problem is equating nominal market price with underlying value, "the fundamentals."
Nominal market price is determined at the margin and can therefore vary both rapidly and widely.
While it is a truism that "in the long run" prices must approximate fundamentals, in the short run a lot of people can be ruined, and there is no model available that is conclusive — because "animal spirits" (Keynes). Traders call it "momo," signifying "momentum," which measured as changes in velocity and acceleration of trends.
The assumptions involved in current models based on rational expectations are too restrictive to account for observed phenomena which include bubbles and busts. The scope of the models are too narrow and miss the "action."
Economics hate to admit that they don't have a model, so they stick with the "best explanation" — which doesn't work at crucial points.
This is a problem affecting regulation and policy since regulators are often economists‚ think Allan Greenspan and Ben Bernanke, and policy is heavily influenced by conventional economic theory and models. Worse, regulators that warn about uncertainty and overextension are sometimes let go as result of being honest.
A Better Theory to Explain Financial Bubbles
Noah Smith, Contributor