a significant sector like, say, tech stocks or residential real estate. Much depends on how big the bubble is-whether it involves a relatively small or specialized asset class vs. It is also possible to have a temporary rebound, known as an echo bubble. At other times, it can trigger a stock market crash, a general economic recession, or even depression. Sometimes, the effect can be small, causing losses to only a few, and/or short-lived.

Cognitive dissonance: only accepting information that confirms an already-held belief, and ignoring anything that doesn'tĪ range of things can happen when an asset bubble finally bursts, as it always does, eventually.

Short-term thinking: just looking at the immediate returns, or thinking you can 'beat the market' and time a quick exit.

Herd mentality: doing something because everyone else is.

Why are they doing this? It has to do not with fundamentals but with human foibles-psychological and often irrational thinking and actions about money, known as behavioral financial biases. Opportunistic investors and speculators are plunging in and pushing prices up even more.

However, a problem arises when an asset bubble begins, snowball-like, to feed on itself-and to swell out of proportion to the fundamentals, or intrinsic worth, of the assets involved. So far, so good: These are all solid factors for appreciation. There are shortages of an asset, causing the cost of it to climb-again, classic supply-and-demand principles.

New products or technologies spur demand and, whenever something's in demand, its price naturally rises (what the economists dub demand-pull inflation).Low-interest rates and other favorable conditions in a nation encourage an influx of foreign investment and purchases.Interest rates might be low, which tends to encourage borrowing for spending, expansion, and investment.Major incubators of bubbles, which often interact or occur in tandem, include: Commodity bubbles involve an increase in the price of traded commodities, 'hard'-that is, tangible-materials and resources, such as gold, oil, industrial metals, or agricultural crops.Īsset bubbles can begin in any number of ways, and often for sound reasons.Specific examples of assets include corporate bonds or government bonds (like US Treasuries), student loans, or mortgages. Credit bubbles involve a sudden surge in consumer or business loans, debt instruments, and other forms of credit.Run-ups in currencies, either traditional ones like the US dollar or euro or cryptocurrencies like Bitcoin or Litecoin, could also fall into this bubble category. Asset Market bubbles involve other industries or sections of the economy, outside of the equities market.These bubbles can include the overall stock market, exchange-traded funds (ETFs), or equities in a particular field or market sector-like Internet-based businesses, which fueled the dotcom bubble of the late 1990s. Stock market bubbles involve equities-shares of stocks that rise rapidly in price, often out of proportion to their companies' fundamental value (their earnings, assets, etc.).In most cases, in fact, a speculative bubble is followed by a spectacular crash in the securities in question. Because speculative demand, rather than intrinsic worth, fuels the inflated prices, the bubble eventually but inevitably pops, and massive sell-offs cause prices to decline, often quite dramatically. The term 'bubble,' in an economic context, generally refers to a situation where the price for something-an individual stock, a financial asset, or even an entire sector, market, or asset class-exceeds its fundamental value by a large margin. The damage caused by the bursting of a bubble depends on the economic sector(s) involved, whether the extent of participation is widespread or localized, and to what extent debt fueled the investments that inflated the bubble.The five steps in the lifecycle of a bubble are displacement, boom, euphoria, profit-taking, and panic.Bubbles are deceptive and unpredictable, but understanding the five stages they characteristically go through can help investors prepare for them.Financial bubbles, aka asset bubbles or economic bubbles, fit into four basic categories: stock market bubbles, market bubbles, credit bubbles, and commodity bubbles.Bubble, in an economic context, generally refers to a situation where the price for something-an individual stock, a financial asset, or even an entire sector, market, or asset class-exceeds its fundamental value by a large margin.

Bubbles explode game