Bigger Fool Theory Law and Legal Definition

According to bigger fool theory, an investor buys a stock that will never pay a cash dividend because the investor assumes a bigger fool will buy the stock at a higher price. The idea of the theory is that there is always a buyer for a security who will pay a better price than the seller paid.

The theory supports buying overvalued property in a hot market because a bigger fool will come along and buy it at a profit. The bigger fool theory reaches its height of popularity near the end of a bull market when speculation is high.

The origin of the theory's name comes from the idea that if an investor makes a foolish decision to buy an expensive security, s/he can find a bigger fool to take it off his/her hands. The bigger fool theory is important to the formation and continuation of speculative bubbles, and only works until the bubble bursts.