The Greater Fool Theory Takes Flight: Reflections on Crypto and AI Mania
Flying home last week from a finance conference focused on utilizing AI in financial planning and investing, I settled into my seat hoping for a quiet flight to catch up on reading. Instead, I found myself an unwilling audience to a spirited conversation among the three passengers seated behind me. The topic? Cryptocurrency investments and AI-related stocks.
Their enthusiasm was palpable, infectious even—but also deeply concerning to anyone familiar with the anatomy of financial bubbles.
“You have to get in now before it’s too late,” one voice insisted. Another chimed in about how a friend had doubled their money in six months on a particular crypto token and now invested in AI mega cap stocks. The third passenger, clearly the newest convert, eagerly asked which AI stocks were “sure things.”
I couldn’t help but think back to an article I wrote explaining why Bitcoin is, fundamentally, just a piece of paper—or more accurately, a string of digits with no intrinsic value, no cash flows, no dividends, and no claim on productive assets. Its value exists purely in the collective belief that someone else will pay more for it tomorrow than you paid today. This is not investing; it’s speculation in its purest form.
The Anatomy of Technological Bubbles
What I overheard on that flight was not new. It was a familiar refrain that echoes through financial history, from tulip mania in 17th-century Holland to the dot-com bubble at the turn of this century. The names change, the technologies evolve, but the human psychology remains remarkably constant.
Brent Goldfarb and David A. Kirsch of the University of Maryland have produced seminal work on this phenomenon in their book Bubbles and Crashes: The Boom and Bust of Technological Innovation. Their research meticulously documents how technological innovation – real, transformative innovation – consistently generates investment bubbles. The pattern is remarkably consistent: a genuinely revolutionary technology emerges, early adopters make substantial returns, media coverage intensifies, and soon a speculative mania ensues that bears little relationship to the underlying economic fundamentals.
Goldfarb and Kirsch identify several key characteristics of technological bubbles. First, there is always a kernel of truth—the technology in question genuinely represents an advance. Railroads did transform commerce. Radio did revolutionize communication. The internet did change how we live and work. And yes, artificial intelligence is transforming multiple industries, and blockchain technology does have legitimate applications.
Second, the transformative potential of the technology makes valuation exceptionally difficult. How do you value a company or asset whose future is genuinely uncertain but potentially enormous? This valuation ambiguity creates space for wild speculation dressed up as informed forecasting.
Third, easy credit and abundant liquidity fuel the fire. When money is cheap and readily available, it flows toward the most exciting narrative, regardless of present-day profitability.
Fourth, and perhaps most importantly, there emerges a powerful social proof dynamic. When your neighbor, your colleague, or the person sitting behind you on an airplane is making money, the fear of missing out becomes overwhelming. Rational analysis gives way to emotional decision-making.
The Current Mania: Crypto and AI
Today, we are witnessing parallel manias in cryptocurrency and artificial intelligence stocks. The crypto market, despite lacking fundamental anchors for valuation, has created paper fortunes and attracted billions in investment. Meanwhile, any company that mentions “AI” in its business plan sees its stock price soar, often regardless of whether it has a viable path to profitability or even revenue.
The passengers behind me on my flight embodied this perfectly. They weren’t discussing price-to-earnings ratios, free cash flow generation, competitive advantages, or sustainable business models. They were discussing momentum, fear of missing out, and what others were saying on social media. They were, quite literally, seeking to become greater fools—willing to pay today’s high price in the hope that an even greater fool would pay more tomorrow.
The Greater Fool Theory in Action
The Greater Fool Theory is simple: you may pay a foolish price for an asset, but you’ll profit as long as there’s a greater fool willing to pay even more. For a time, this strategy can work spectacularly well. Prices can continue rising far beyond any reasonable valuation, propelled by momentum, media attention, and the steady stream of new entrants eager to participate in the apparent windfall.
This is why bubbles are so difficult to spot in real-time and even more difficult to time. The skeptic who warns of overvaluation in 2021 looks foolish in 2023 when prices have doubled again. The rational investor who stays on the sidelines watches others get rich, at least on paper.
But here’s the critical point that bubble participants consistently ignore: without a commensurate increase in earnings, sales, or revenue—without fundamental economic value creation—each price increase actually magnifies the downside risk. The higher the price climbs relative to underlying fundamentals, the further it can fall.
When Bitcoin trades at $100, losing 90% of your investment means it falls to $10—a significant loss, certainly, but perhaps recoverable. When it trades at $100,000, a 90% loss means falling to $10,000—a catastrophic wealth destruction event for those who bought near the top. The same principle applies to AI stocks trading at stratospheric valuations based on promise rather than performance.
The Inevitable Reckoning
History teaches us that all bubbles burst. The timing is unpredictable – bubbles can inflate far longer and grow far larger than rational analysis suggests possible. But the ending is always the same: a rush for the exits, a collapse in prices, and a painful period of reconciliation between price and value.
Those passengers behind me, enthusiastically encouraging each other to invest more heavily in crypto and AI stocks, may indeed see prices continue to rise. They may feel vindicated in their strategy for months or even years to come. Each new greater fool who enters the market pushes prices higher and reinforces their belief that they’ve discovered a path to easy wealth.
But they are playing a dangerous game, one where the risk increases with each passing day that prices diverge further from economic fundamentals. When the music stops—and it always stops—many will find themselves holding assets that have lost 70%, 80%, or 90% of their value. They will learn the painful lesson that speculation is not investment, that momentum is not strategy, and that prices unsupported by earnings or cash flows eventually return to earth, regardless of how compelling the narrative seemed during the mania.
As I listened to those passengers make plans to invest more aggressively, to encourage friends and family to join them, to perhaps even leverage their investments through borrowing, I felt a familiar mixture of concern and resignation. Markets will do what markets do. Bubbles will inflate and burst. Human psychology has not changed in centuries and likely will not change in my lifetime.
As a finance professor, all I can do is what I’ve always done: teach the principles of sound investing, warn about the dangers of speculation, and hope that at least some will listen before they learn these lessons the expensive way.
The flight eventually landed. The conversation behind me continued until we taxied to the gate. I gathered my belongings and wished them well, silently hoping they wouldn’t be the greatest fools when the bubble eventually bursts.
