Miller & Modigliani Circular Reasoning

In the paper "Dividend Policy, Growth, and the Valuation of Shares" Miller & Modigliani present the idea that dividend policy is irrelevant to firm value.  More specifically they are addressing the payout policy of the firm.  As in most financial academic papers they make some pretty unrealistic assumptions of markets along the lines of the efficient market hypothesis.  However later in the paper they make a startlying address to rationality in the markets:

"For if an ordinarily rational investor had good reason to believe that other investors would not behave rationally, then it might well be rational for him to adopt a strategy he would otherwise have rejected as irrational.  Our postulate thus rules out, among other things, the possibility of speculative "bubbles" wherein an individually rational investor buys a security he knows to be overpriced... in the expectation that he can resell it at a still more inflated price before the bubble bursts." 

They add to this bold statement with a footnote:
"We recognize, of course, that such speculative bubbles have actually arisen in the past... We feel, however, that is also not of universal applicability since from our observation, speculative bubbles, tough well publicized whey they occur, do not seem to us to be a dominant, or even a fundamental, feature of actual market behavior under uncertainty."

I would respond to the footnote by suggesting a look at the book "This Time Is Different."
What i found amusing while reading the main text of the paper was the similarity or the circular reasoning i believe the authors unwittingly present with that of a famous scene from the movie The Princess Bride.  In the scene where the Man in Black and Vizzini face off in a battle of wits, Vizzini is trying to determine in which of the two goblets the Man in Black has placed some deathly iocane powder.  
Vizzini: "But it's so simple. All I have to do is divine from what I know of you: are you the sort of man who would put the poison into his own goblet or his enemy's? Now, a clever man would put the poison into his own goblet, because he would know that only a great fool would reach for what he was given. I am not a great fool, so I can clearly not choose the wine in front of you. But you must have known I was not a great fool, you would have counted on it, so I can clearly not choose the wine in front of me."