You may have had this experience: you were quite clear-headed, but then you saw everyone rushing to buy something, and suddenly your mind got heated. You thought, regardless of whether it's true or not, you should grab it first. When you came to your senses, you realized you actually didn't need it at all. Why does this happen? The "Greater Fool Theory" can explain our behavior.
Greater Fool Theory#
Also known as the "maximum fool theory," it was proposed by Keynes in his 1936 publication "The General Theory of Employment, Interest, and Money." Here is a detailed introduction to the Greater Fool Theory:
Definition
In capital markets such as futures and securities, people completely disregard the true value of something and are willing to pay high prices because they expect that there will be a greater fool who will pay an even higher price to take it off their hands. If no greater fool comes along to pay a higher price, then they themselves are the greatest fool.
Classification of Foolish Behavior
Emotional Foolishness: Acting without realizing they have entered a game of foolishness, and not understanding the rules and inevitable outcomes of the game.
Rational Foolishness: Clearly aware of the foolishness and related rules, and based on their judgment and analysis of public psychology, they believe that more foolish investors will join in the current situation, which is why they invest money to take a gamble.
1. What you are buying is not the item, but the illusion that "someone will take over"#
This means: the reason you dare to buy is not because the item itself is valuable, but because you believe there will definitely be "more foolish people" who will take over at a higher price. It's not that you truly believe in it; you just trust that others are more impulsive. For example, the recent craze: labubu (no need to elaborate, I think everyone has noticed it). This psychological mechanism appears not only in business, stock trading, and real estate but also in daily life. Snapping up discount coupons, following trending topics, and even impulsively changing jobs—many times we are not relying on our own analysis but rather observing how others are acting. Ultimately, the Greater Fool Theory is not just economics; it's also psychology.
2. Why do you fall into the trap of "greater fools"?#
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First, everyone is afraid of being left out
Seeing others buy, even if you don't understand, you want to try it out, otherwise, you feel like you are "behind on information." This is just following the crowd. You don't really believe in the product; you are just afraid of missing out. -
Second, we tend to only pick what we want to hear
This is called confirmation bias. Once you lean towards believing a certain outcome, you will unconsciously look for evidence that supports that outcome. For example, if you are interested in a stock and one person says it will rise, you immediately nod; if ten people say the risks are high, you act as if you didn't see it. -
Third, some people are "overly confident" in themselves
They always think they can be a step ahead of others and not be the last fool. But isn't that what everyone is thinking? The more someone thinks this way, the easier it is to fall into a trap. -
Fourth, when emotions rise, rationality can't stop you
You think you are "analyzing before acting," but many times emotions have already taken the wheel. Greed, anxiety, and luck all mix together, and in the end, what you bought is not the item, but a self-soothing expectation.
Case Story#
Xiao Li was quite stable, with a few years of investment experience and decent results. One day he came across a stock that was said to "have insider information and will surge," and many people online were sharing it. He didn't really understand what the company did and bought it directly. Because he believed, "After all, I'm not the last fool." At first, it did rise a bit, and Xiao Li felt a bit proud, even thinking about increasing his position. But after a few days, the stock price plummeted. He didn't even have time to run; he watched helplessly as his account turned red. Later he said he hadn't understood the company's background at all; he was just afraid of "missing the opportunity." In fact, many of us may have encountered similar situations. Not just in the stock market, but elsewhere. Sometimes people are not unintelligent; they just want to take a gamble and win.
Want to avoid being that "last one to take over"? Then you can only stabilize bit by bit#
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Don't care too much about "what others choose"
Listening is fine, but don't take others' decisions as your navigation. Many times, others are just following others too. -
Don't selectively read information
Make sure to read the "opposing opinions" as well. Whether a choice is worth making often depends not on how much praise it receives, but on whether you can still accept it when it is questioned. -
Leave some emotional buffer
If you really want to buy or invest, don't rush to confirm. Wait a day or two, then come back and see if you are still impulsive. -
Finally, don't be afraid of making mistakes; what you should fear is not reflecting
Making a mistake once is not embarrassing; the key is whether you can figure out where you went wrong. Everyone can step into a pit, but some people learn to go around it.
Can you avoid being a "fool"? Not necessarily. But if you really want to make fewer mistakes, at the very least, you need to be willing to pause and think: Am I seeing value now, or do I just think there will be a "greater fool" behind me? The answers differ, and the outcomes may be drastically different.