Markets can act irrationally even if the players are acting rationally. This is because of players acting in their own self-interest. For example, if an investm

Markets can act irrationally even if the players are acting rationally. This is because of players acting in their own self-interest. For example, if an investment bank takes an enormous risky position that backfires, it may appear irrational. Then consider the massive severance package and/or political support that protects the executive or firm! Now that risky position isn't so risky after all. I think my point is that "rational" acting is not a clear-cut term that describes a market and its players. Let's take a look at another player, Joe Homebuyer who has access to easy loan money and can buy well out of his price range. Given that home prices had risen consistently for so long (perhaps longer than Joe Homebuyer has been living), at what point does the overvalued price of the house become irrational? Maybe it's when the mortgage-to-rent ratio is too far off, maybe it is some other trigger, but Joe Homebuyer thinks he has protection anyway because he cannot conceive of the possibility that prices will drop. All of his experience shows only gains for this purchase. So, is buying that overpriced house rational or irrational? Seems rational to Joe, but irrational to people with more information about the market.