DeLong: The Simplest Possible Behavioral Finance Bubble Model
There are, I think, two big questions in behavioral finance:
Under what circumstances will normal, human behavior by investors produce forces in financial markets that drive them to speculative excess?
Under what circumstances will arbitrageurs--smart, sophisticated investors who understand what is going on--fail to help the situation much?
A first whack at trying to answer (1):
Download now or preview on posterous