Stock market bubble
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A stock market bubble is a type of economic bubble taking place in stock markets, in which a wave of public enthusiasm, evolving into herd behavior, causes an exaggerated bull market. When such a bubble takes place, market prices of listed stocks rise dramatically, making them significantly overvalued by any measure of stock valuation. Generally stock market bubbles are followed by stock market crashes.
Examples
Some of those bubbles are created because of intense and excessive speculation on a new technology or service. The Dot-com bubble of the late 1990s is one example [link]. The biotech boom in the 1980s is another. Still other examples of stock market bubbles include Japanese stocks in the late 1980s, Nifty Fifty stocks in the early 1970s, and Taiwanese stocks in 1987.
Some of the first documented economic bubbles were the South Sea bubble in England in the 1700s and the Tulip bulb bubble in Holland in the 1600s.
A stock market bubble may set the stage for a later stock market crash, continuing our example, the Stock market downturn of 2002.
A rational or irrational phenomenon?
Emotional and cognitive biases (see behavioral finance) seem to be the causes of bubbles. But, often, when the phenomenon appears, pundits try to find a rationale, so as not to be against the crowd. Thus, sometimes, people will dismiss concerns about overpriced markets by citing a new economy where the old stock valuation rules may no longer apply. This type of thinking helps to further propagate the bubble whereby everyone is investing with the intent of finding a greater fool.
See also
- Collective behavior
- Tulip mania
- Fictitious capital
- The South Sea Company
- Mississippi Company
- Railway Mania
- Poseidon bubble
- Market trends
External links
- Accounts of the South Sea Bubble, John Law and the Mississippi Company, and the tulip mania can be read in Charles Mackay's classic Extraordinary Popular Delusions and the Madness of Crowds (1843) - [available from Project Gutenberg].
- [the compelling Real DJIA, 1924-now]
- [the 3 Fed Chair warnings, Real DJIA]
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