Behavioral Finance Explains Bubbles
Editor’s note: Adam Nash is the chief operating officer of Wealthfront, a SEC-registered, software-based
“Bubbles are beautiful, fun and fascinating, but do you know what they are and how they work ? Here’s a look at the science behind bubbles.” – About.com Chemistry, “Bubble Science”
“Double, double toil and trouble
Fire burn, and cauldron bubble.” – Macbeth, Act 4, Scene 1
Fire burn, and cauldron bubble.” – Macbeth, Act 4, Scene 1
Given the incredible volatility we’ve seen lately in the Bitcoin and gold markets, there has been a resurgence in discussion about bubbles. This topic is always top of mind in Silicon Valley, especially given that the two favorite local topics of conversation are technology companies and housing.
Defining a market bubble is actually a bit trickier than it might first appear. After all, what differentiates the inevitable booms and busts involved in almost any business and industry from a “bubble”?
The most common definition of a speculative or market bubble is when a broad-based, surging euphoria or wave of optimism carries asset prices well beyond supportable value. The canonical bubble was the tulip mania of the 1630s, but it extends across history and countries all the way up to the Internet bubble of the late 1990s and the housing bubbles in the past decade.
