Why asset prices do not follow fundamentals

An asset’s fundamental value (we look at the case of equities) is the discounted sum of the future income provided by holding it. But in reality, the actual price of an asset does not follow its fundamental value. This is understandable: When interest rates, plus a normal risk premium, are lower than growth rates, an asset’s fundamental value can no longer be calculated (it tends towards infinity); In the normal situation where interest rates, plus a reasonable risk premium, are higher than growth rates, there are a multitude of asset price trajectories that include stochastic bubbles and that deviate from the asset’s fundamental value. So there is no reason why an asset’s price should correspond to its fundamental value.