[Cyrus]

[ QUOTE ]
Lets say I buy a stock that appears to be in a bubble situation. I believe that the stock will keep rising because the frenzy shows no signs of letting up. I am making some assumptions when I place my buy (e.g., the frenzy will continue, the economic situation hasnt changed, etc.). My assumptions may be wrong but it doesnt mean that I was irrational.

Another example. When I buy stock I assume the books aren't cooked. Now, if it comes out that the books are cooked and the stock drops dramatically, it doesnt mean that I was irrational. It only means that my information is incorrect.

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In your 2nd example, you were dealing with partially hidden information and the part that was hidden (from you) caused you to make a decision which was, in retrospect, wrong. Nothing irrational, seemingly.

But in your 1st example, all the information is out there!

And it looks like you are simply evaluating it erroneously. You are buying into a stock that's "in a bubble situation", as you wrote. You are betting that "the stock will keep rising because the frenzy shows no signs of letting up". In other words, it is your decision, based on the available information, that turns out to be incorrect and not the information itself.

Some would even say, it is an irrational decision, by some definitions of the term (i.e. believing that stockmarket bubbles are more likely to grow further rather than burst, ignoring historical precedent, etc).

--Cyrus

PS : I am assuming that your "utility" is to maximize return in both examples.