The Website Priced at the Moon - bubbles and the limits to arbitrage

The valley’s water market, where the PRICED AT THE MOON box says “the price runs ahead of the water, and can stay there for years”. This lesson is how a price can be obviously wrong and still nobody can fix it.

Before you start. From A Drunk Walk Through Paris - the random walk and the efficient market: in an efficient market, news is priced in so fast that there is no easy free money left to pick up. From A Price With No Opinion in It - no-arbitrage, replication and the binomial tree: arbitrage means buying one thing and selling its exact copy at a different price, and in theory it pins prices together. From Borrowed Water - leverage, margin calls and the growth-optimal bet: a borrower who cannot meet a margin call is forced to sell, whatever they believe. From The Sale Made at the Bottom - the behaviour gap: people buy after prices rise and sell after they fall.