Financial Glossary: Bubble


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Bubble

Bubble

A speculative venture that has little chance of making a profit.

When this fact becomes evident, the bubble burst and prices fall. The cause of bubbles remains a mystery to economic theory. It has been recently shown that bubbles appear even without uncertainty, speculation, or bounded rationality.

Most recently, it has been suggested that bubbles might ultimately be caused by processes of price coordination or emerging social norms. Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often identified only in retrospect, when a sudden drop in prices appears. Such drop is known as a crash or a bubble burst. Both the Boom and the bust 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 chaotically, and become impossible to predict from supply and demand alone.

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