Confusion over government policy can actually protect the economy by stopping risky investment bubbles before they grow too large.
April 23, 2026
Original Paper
POLICY UNCERTAINTY AS A BUBBLE MODERATOR: AI AND ENDOGENOUS INVESTOR PARTICIPATION
SSRN · 6620132
The Takeaway
High levels of policy uncertainty act as a stabilizer that filters out risk-averse momentum traders. This forcing mechanism requires new technologies to mature in private markets for longer periods before they go public. We usually assume that a clear and predictable government policy is always better for the stock market. These findings suggest that uncertainty prevents the kind of explosive dot-com style crashes that ruin retail investors. For the field of AI, this means that the current regulatory confusion might be making the industry healthier in the long run.
From the abstract
This paper proposes and tests a theory in which policy uncertainty moderates theamplitude of speculative bubbles around general-purpose technologies by altering thecomposition of investors in public equity markets. In the model, a new technologygenerates a cash-flow distribution whose variance narrows over time as markets learn.Bubbles arise because asset prices reflect the beliefs of the marginal participatinginvestor, who is optimistically biased when outcome uncertainty is high. Policyuncerta