Because it is often difficult to observe intrinsic values in zeepbel bitcoin wiki-life markets, bubbles are often conclusively identified only in retrospect, once a sudden drop in prices has occurred. Such a drop is known as a crash or a bubble burst. More recent theories of asset bubble formation suggest that these events are sociologically driven.
For instance, explanations have focused on emerging social norms and the role that culturally-situated stories or narratives play in these events. 1720 British South Sea Bubble, and originally referred to the companies themselves, and their inflated stock, rather than to the crisis itself. Wright argues that bubbles can be identified before the fact with high confidence. Irving Fisher, and elaborated within Post-Keynesian economics. A protracted period of low risk premiums can simply prolong the downturn in asset price deflation as was the case of the Great Depression in the 1930s for much of the world and the 1990s for Japan. Not only can the aftermath of a crash devastate the economy of a nation, but its effects can also reverberate beyond its borders.
Another important aspect of economic bubbles is their impact on spending habits. In an economy with a central bank, the bank may therefore attempt to keep an eye on asset price appreciation and take measures to curb high levels of speculative activity in financial assets. Historically, this is not the only approach taken by central banks. In the 1970s, excess monetary expansion after the U. These bubbles only ended when the U. It has also been variously suggested that bubbles may be rational, intrinsic, and contagious. To date, there is no widely accepted theory to explain their occurrence.
Puzzlingly for some, bubbles occur even in highly predictable experimental markets, where uncertainty is eliminated and market participants should be able to calculate the intrinsic value of the assets simply by examining the expected stream of dividends. While there is no clear agreement on what causes bubbles, there is evidence to suggest that they are not caused by bounded rationality or assumptions about the irrationality of others, as assumed by greater fool theory. More recent theories of asset bubble formation suggest that they are likely sociologically-driven events, thus explanations that merely involve fundamental factors or snippets of human behavior are incomplete at best. One possible cause of bubbles is excessive monetary liquidity in the financial system, inducing lax or inappropriate lending standards by the banks, which makes markets vulnerable to volatile asset price inflation caused by short-term, leveraged speculation. But these aren’t just a series of unrelated accidents.
Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities. Simply put, economic bubbles often occur when too much money is chasing too few assets, causing both good assets and bad assets to appreciate excessively beyond their fundamentals to an unsustainable level. According to this explanation, the bubbles continue as long as the fools can find greater fools to pay up for the overvalued asset. The argument is that investors tend to extrapolate past extraordinary returns on investment of certain assets into the future, causing them to overbid those risky assets in order to attempt to continue to capture those same rates of return. When investors feel that they are no longer well compensated for holding those risky assets, they will start to demand higher rates of return on their investments. Another related explanation used in behavioral finance lies in herd behavior, the fact that investors tend to buy or sell in the direction of the market trend. Investment managers, such as stock mutual fund managers, are compensated and retained in part due to their performance relative to peers.