Re: bubbles and panics, or rational responses?

["James R. Olson, jr." <jhavok@xxxxxxxx>]

At 06:29 PM 10/9/97 -0400, Basil Moore wrote:
>  James Olsen
>
>        The claim is that asset values are the discounted present value of
>the future income stream to which the owner is entitled. If the income
>stream is a perpetuity, and if it is expected to grow at a rate in excess of
>the rate at which the asset is discounted, the discounted present value of
>the asset becomes infinite.

Is this PV = R/(r-g) ?  I don't know the derivation of that, or what R
refers to, but it seems to me that when (r-g) is negative, PV should be
negative as well.
>
>        It does not of course follow that the price will be infinite. But it
>is the cause of a "rational bubble".

Still, the existence of "rational bubbles" doesn't mean that there are no
irrational bubbles or panics, which is what the claim that prices are set
only through expectations of future income flows says.  How many of the
companies on NASDAQ have never had an income flow?  From what I've been
reading, its a pretty significant number.  And a good case in point (pun)
is AOL, which has NEVER in its history had a positive cash flow, but it
still seems to maintain some sort of value as a stock.

I understand that expectations can be irrational, of course...

Are we dealing with another one of these cases where problems with the
concept lead to it being defined away (my interpretation of the recent
brewhaha over U max)?