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Investing Glossary – Economic Bubble (Bubble)

The following is either adapted or copied from Wikipedia. Some small adjustments and additions may have been made by Investor in the Family staff. For more, see our Investing Glossary.

An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is “trade in high volumes at prices that are considerably at variance with intrinsic values“. It could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often conclusively identified only in retrospect, when a sudden drop in prices appears. Such a drop is known as a crash or a bubble burst. Both the boom and the burst phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Prices in an economic bubble can fluctuate erratically, and become impossible to predict from supply and demand alone.

While some economists deny that bubbles occur, the cause of bubbles remains disputed by those who are convinced that asset prices often deviate strongly from intrinsic values. Many explanations have been suggested, and research has recently shown that bubbles may appear even without uncertainty, speculation, or bounded rationality. It has also been suggested that bubbles might ultimately be caused by processes of price coordination or emerging social norms.

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