We present an extrapolative model of bubbles.In the model, many investors form their demand for a risky asset by weighing two signals-an average of the asset's past price changes and the asset's degree of overvaluation.The two signals are in conflict, and investors "waver" over time in the relative weight they put on them.The model predicts that good news about fundamentals can trigger large price bubbles.We analyze the patterns of cash-flow news that generate the largest bubbles, the reasons why bubbles collapse,…