Asset bubbles can begin in any number of ways, and often for sound reasons. Major incubators of bubbles, which often interact or occur in tandem, include:<\/p>
So far, so good: These are all solid factors for appreciation. However, a problem arises when an asset bubble begins, snowball-like, to feed on itself<\/a>—and to swell out of proportion to the fundamentals, or intrinsic worth, of the assets involved. Opportunistic investors and speculators are plunging in and pushing prices up even more.<\/p> 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<\/a> biases. These behaviors include things like:<\/p> A range of things can happen when an asset bubble finally bursts, as it always does, eventually. Sometimes, the effect can be small, causing losses to only a few, and/or short-lived. At other times, it can trigger a stock market crash, a general economic recession, or even depression. It is also possible to have a temporary rebound, known as an echo bubble<\/a>.<\/p> Much depends on how big the bubble is—whether it involves a relatively small or specialized asset class vs. a significant sector like, say, tech stocks or residential real estate. And, of course, how much investment money is involved.<\/p> Another factor is to what degree debt is involved in inflating the bubble. A major 2015 research study, "Leveraged Bubbles<\/a>," examined asset bubbles in 17 countries dating back to the 1870s. It categorized them into four types, but along two basic lines, based on credit—that is, how funded investments were by financing and borrowing.<\/p> The study found that the more credit involved, the more damaging the bubble's pop. Debt-fueled equity bubbles led to longer-lived recessions. Even worse were leveraged housing bubbles, like the one that popped in 2006-07, leading to the subprime mortgage crisis<\/a> that kicked off the Great Recession<\/a>.<\/p>"
}
}
,
{
"@type": "Question",
"name": "What Is an Indicator of an Economic Bubble?",
"acceptedAnswer": {
"@type": "Answer",
"text": " One of the tricky things about bubbles is that they're hard to spot while you're in one. Only in hindsight, after they burst, do they become clear.<\/p> One such was the dotcom bubble that occurred around the turn of the 21st century. It was a rapid rise in U.S. technology stocks, especially those in then-novel Internet-based companies, that helped lift the stock markets in general. The tech-dominated Nasdaq<\/a> index quintupled in value, from under 1,000 to more than 5,000 between 1995 and 2000.<\/p> Unfortunately, when many of the new, hot tech companies failed to turn a profit or perform up to expectations, investors soured on them. In 2001-02, the bubble popped. In the ensuing crash, the Nasdaq index fell over 75%. Stocks in general entered a bear market<\/a>.<\/p>"
}
}
,
{
"@type": "Question",
"name": "What Is a Bubble in Finance?",
"acceptedAnswer": {
"@type": "Answer",
"text": " A financial bubble, also known as an economic bubble or an asset bubble, is characterized by a fast, large climb in the market price of different assets. This rapid growth, though, is relatively short-lived—like the bursting of a bubble—and it abruptly reverses course, dragging asset prices down with it, sometimes even lower than their original levels.<\/p> Typically, a bubble is created out of sound fundamentals<\/a>, but eventually exuberant, irrational behavior takes over, and the surge is caused by speculation—buying for the sake of buying, in the hopes prices continue to rise.<\/p>"
}
}
]
} ] }
]