Bubble
An economic bubble is a phenomenon in markets created by herd mentality, whereby people hear stories of others who bought in early and made big profits, causing those who did not buy to feel a fear of missing out. This causes irrational pricing of the asset which proceeds until the mania subsides.
Attempting to time the market on bubbles is a zero-sum game and has a negative expected return.
Historical bubbles:
- South Sea Bubble
- Beanie Baby Bubble
- London Rail Bubble
- Tulip Mania
- Dot-com Bubble
- Japanese Real Estate Bubble
- Crypto asset Bubble
See "madness of crowds", market mania and bandwagon bias.
References
- Mackay, Charles. 2012. Extraordinary Popular Delusions and the Madness of Crowds. Simon and Schuster.
- Bernstein, William J. 2021. The Delusions of Crowds: Why People Go Mad in Groups. Grove Press.
- Blanchard, Olivier J, and Mark W Watson. 1982. ‘Bubbles, Rational Expectations and Financial Markets’. NBER Working Paper, no. w0945.
- Taleb, Nassim Nicholas. 2021. ‘Bitcoin, Currencies, and Fragility’. ArXiv:2106.14204 [Physics, q-Fin], July. http://arxiv.org/abs/2106.14204.
- Caferra, Rocco, Gabriele Tedeschi, and Andrea Morone. 2021. ‘Bitcoin: Bubble That Bursts or Gold That Glitters?’ Economics Letters 205: 109942. https://doi.org/10.1016/j.econlet.2021.109942.
- Andrés, Pablo de, David Arroyo, Ricardo Correia, and Alvaro Rezola. 2022. ‘Challenges of the Market for Initial Coin Offerings’. International Review of Financial Analysis 79: 101966. https://doi.org/10.1016/j.irfa.2021.101966.
- Corradi, Fiammetta, and Philipp Höfner. 2018. ‘The Disenchantment of Bitcoin: Unveiling the Myth of a Digital Currency’. International Review of Sociology 28 (1): 193–207. https://doi.org/10.1080/03906701.2018.1430067.
- Cembalest, Michael. 2022. ‘The Maltese Falcoin: On Cryptocurrencies and Blockchains’. https://privatebank.jpmorgan.com/content/dam/jpm-wm-aem/global/pb/en/insights/eye-on-the-market/the-maltese-falcoin.pdf.
- Shri T Rabi Sankar. n.d. ‘Cryptocurrencies – An Assessment’. Reserve Bank of India. Accessed 2 March 2022. https://rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1196.
- Chancellor, Edward. 1999. ‘Devil Take the Hindmost: A History of Financial Speculation’.
- Demmler, Michael, and Amilcar Orlian Fernández DomÃnguez. 2021. ‘Bitcoin and the South Sea Company: A Comparative Analysis’. Revista Finanzas y PolÃtica Económica 13 (1): 197–224.
- Kolchinski, Alex. 2022. ‘Crypto Is an Unproductive Bubble’. Alex Kolchinski (blog). 18 March 2022. https://alexkolchinski.com/2022/03/18/crypto-is-an-unproductive-bubble/.
- Smales, L. A. 2022. ‘Investor Attention in Cryptocurrency Markets’. International Review of Financial Analysis 79: 101972. https://doi.org/10.1016/j.irfa.2021.101972.
- Zetzsche, Dirk A, Ross P Buckley, Douglas W Arner, and Linus Föhr. 2017. ‘The ICO Gold Rush: It’s a Scam, It’s a Bubble, It’s a Super Challenge for Regulators’. University of Luxembourg Law Working Paper, no. 11: 17–83.