Market Valuations Driven by an Optimistic Minority: The Paradox Explained

The phenomenon of market overvaluation hinges on an interesting paradox. Valuations are determined by an optimistic minority rather than a skeptical majority. This dynamic is deeply rooted in auction-based price formations and the concept of marginal investors.

Despite widespread belief that markets are overvalued, microeconomic principles reveal this paradox. Investors often feel a sense of unease while remaining engaged in trading, as they react to perceived valuations that do not reflect the broader economic landscape.