In finance, the greater fool theory suggests that one can sometimes make money through the purchase of overvalued assets — items with a purchase price drastically exceeding the intrinsic value — if those assets can later be resold at an even higher price.
In this context, one "fool" might pay for an overpriced asset, hoping that he can sell it to an even "greater fool" and make a profit.
This only works as long as there are enough new "greater fools" willing to pay higher and higher prices for the asset.
Eventually, investors can no longer deny that the price is out of touch with reality, at which point a sell-off can cause the price to drop significantly until it is closer to its fair value, which in some cases could be zero.
In the stock market, the greater fool theory applies when many investors make a questionable investment, with the assumption that they will be able to sell it later to "a greater fool".
In other words, they buy something not because they believe that it is worth the price, but rather because they believe that they will be able to sell it to someone else at an even higher price
In real estate, the greater fool theory can drive investment through the expectation that prices always rise. A period of rising prices may cause lenders to underestimate the risk of default.
