Considering their importance and the amount of effort that has gone into understanding them, asset price bubbles continue to perplex. The evidence of these bubbles seldom squares with what would be expected from standard asset price theory. Unlike the suggestions from theory, expectations of prices of both stocks and houses tend to be procyclical—price expectations are driven by recent price performance. Thus, price expectations are extrapolative rather than rational, as assumed by standard asset price theory. Recognizing the role of extrapolative expectations in asset pricing will make monetary and macroprudential policy both more robust and more complex.