Define: Greater Fool Theory

UK Accounting Glossary

Definition: Greater Fool Theory



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Full Definition of Greater Fool Theory


The greater fool theory says there’s always someone – an even greater fool – that will overpay for a stock that is already overpriced. The greater fool theory may be used as a general investment strategy during an overheated bull market. More frequently, the greater fool theory applies to highly speculative equities, with ritzy names but few earnings. While cynical, the greater fool theory contains some truth: Money managers who, based on the fundamentals, ignore the greater fool theory and refuse to buy highly speculative stocks – like Japanese bank equities in the 1980s or Internet stocks in the 1990s – can cost their clients billions. As the greater fool theory predicted, for years there was always some “fool” who paid even more for these overpriced investments. The major problem with the greater fool theory is the enormous downside risk: At some point, despite the greater fool theory, no one will buy such an overpriced stock and its price collapses.


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Definition Sources


Definitions for Greater Fool Theory are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 9th February 2020.