The paper "Positive Feedback Investment Strategies and Destabilizing Rational Speculation" by De Long, Shleifer, Summers, and Waldmann explores the impact of rational speculators on financial markets, particularly when these speculators engage in positive feedback trading strategies. Positive feedback trading involves buying when prices rise and selling when prices fall, which can amplify price movements away from fundamental values. The authors argue that rational speculators may benefit from jumping on this bandwagon, anticipating that their actions will trigger further positive feedback from noise traders, leading to increased volatility. The paper presents a model where rational speculators, informed rational speculators, and passive price/earnings investors interact. Informed rational speculators aim to maximize utility by betting on the reversion to fundamentals, while passive investors react to price levels relative to their fundamental value. The model shows that the presence of informed rational speculators can destabilize prices, especially when positive feedback traders are active. This is because the rational speculators' actions can trigger positive feedback, leading to higher prices in the short run, which further encourages positive feedback trading. The authors also discuss the implications of this model for market manipulation by sophisticated investors. They argue that in the presence of positive feedback traders, rational speculators can potentially manipulate markets by anticipating and responding to future demand shocks. The paper concludes by highlighting the importance of understanding positive feedback trading in financial markets and its role in price volatility.The paper "Positive Feedback Investment Strategies and Destabilizing Rational Speculation" by De Long, Shleifer, Summers, and Waldmann explores the impact of rational speculators on financial markets, particularly when these speculators engage in positive feedback trading strategies. Positive feedback trading involves buying when prices rise and selling when prices fall, which can amplify price movements away from fundamental values. The authors argue that rational speculators may benefit from jumping on this bandwagon, anticipating that their actions will trigger further positive feedback from noise traders, leading to increased volatility. The paper presents a model where rational speculators, informed rational speculators, and passive price/earnings investors interact. Informed rational speculators aim to maximize utility by betting on the reversion to fundamentals, while passive investors react to price levels relative to their fundamental value. The model shows that the presence of informed rational speculators can destabilize prices, especially when positive feedback traders are active. This is because the rational speculators' actions can trigger positive feedback, leading to higher prices in the short run, which further encourages positive feedback trading. The authors also discuss the implications of this model for market manipulation by sophisticated investors. They argue that in the presence of positive feedback traders, rational speculators can potentially manipulate markets by anticipating and responding to future demand shocks. The paper concludes by highlighting the importance of understanding positive feedback trading in financial markets and its role in price volatility.