Market Bubbles

What is a Market Bubble?

A market bubble, or speculative bubble, occurs when the price of an asset, such as a stock or real estate, rises to a level that is far above its fundamental or intrinsic value. These bubbles are driven by irrational exuberance and the belief that "this time is different." The bubble is eventually followed by a crash, as prices come back down to reality.

The Five Stages of a Bubble

Economist Hyman Minsky outlined five stages of a typical credit bubble:

1. Displacement: A new paradigm or technology captures the imagination of investors (e.g., the internet in the late 1990s).
2. Boom: Prices start to rise, attracting more and more investors. The media begins to cover the story.
3. Euphoria: Caution is thrown to the wind as prices skyrocket. The "greater fool" theory takes hold, where investors buy assets assuming they can sell them to someone else at an even higher price.
4. Profit Taking: Smart money and insiders begin to sell and take profits.
5. Panic: The bubble bursts, and prices plummet. Panic selling ensues as investors rush to get out.

Historical Examples

History is filled with examples of speculative bubbles, from the Dutch Tulip Mania in the 1600s to the Dot-com bubble of the late 1990s and the U.S. housing bubble in the mid-2000s. While the specific asset changes, the underlying human psychology of greed and fear remains the same.