Title: Thought Viruses and Asset Prices,
Abstract: We use insights from epidemiology, namely the SIR model, to study how agents
infect each other with "investment ideas." Once an investment idea "goes
viral," equilibrium prices exhibit the typical "fever peak," which is
characteristic for speculative excesses. Using our model, we identify a time
line of symptoms that indicate whether a boom is in its early or later stages.
Regarding the market's top, we find that prices start to decline while the
number of infected agents, who buy the asset, is still rising. Moreover, the
presence of fully rational agents (i) accelerates booms (ii) lowers peak prices
and (iii) produces broad, drawn-out, market tops.