Greater Fool Theory

November 21, 2023 - Around 2 mins mins to read

Understanding the Greater Fool Theory

The concept of the Greater Fool Theory was originally introduced by professor Burton Malkiel. According to Malkiel, investors have the potential to make a profit by purchasing stocks or other investment assets that are clearly overvalued. This theory is based on the observation that people are often attracted to assets with increasing prices due to biases in human behavior. Additionally, the theory suggests that herd mentality plays a role in exacerbating this effect, as stories of others achieving immediate success are likely to inspire others to seek similar gains. Essentially, the Greater Fool Theory proposes that there will always be someone willing to buy the asset at a higher price.

An Example of the Greater Fool Theory

One way to comprehend the Greater Fool Theory is by examining its application in the digital assets market, particularly in the case of meme coins. Two popular meme coins, Doge and Shiba Inu, serve as prime examples. The existence of these coins has led to the creation of millionaires and billionaires. As more stories of individuals achieving immense wealth circulate, it attracts “greater fools” who irrationally believe that they too can become millionaires. In some cases, these meme coins may even turn out to be outright scams, such as the “Squid Game” coin based on the popular South Korean Netflix drama.

Author: Gunnar Jaerv is the chief operating officer of First Digital Trust, a technology-driven financial institution in Hong Kong that powers the digital asset industry and serves financial technology innovators. Before joining First Digital Trust, Gunnar founded several tech startups, including Peak Digital in Hong Kong and Elements Global Enterprises in Singapore.