"It is at this juncture that the formation of an investment crowd causes the market to begin its departure from fair value. New members of the crowd accept the investment theme as proven to be correct because of the big change in market price they have observed. They no longer attempt independent assessments of the relationship of price to fair value and instead accept the onward and upward assertion of fellow crowd members at face value. This willing suspension of independent thought by crowd members is the explanation for the market mistake associated with the crowd. As the crowd’s size grows, its collective market position forces the market price much higher than any reasonable estimate of fair value. The resulting bubble may well keep the market price too high for a sustained period of time if the group’s social bonds are strong and continually reinforced. But eventually all such bubbles must deflate as the underlying forces of economic competition assert themselves and drive the profitability of the associated businesses down to normal levels."
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