Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What Causes a Financial Bubble?

Stock-Markets / Liquidity Bubble Nov 11, 2020 - 10:20 AM GMT

By: Travis_Bard

Stock-Markets

Financial bubbles refer to a situation in which an asset sees a rapid increase in price and demand driven by a theoretical interest, then crashes as the rising prices become unsustainable over time. When reaching a specific value, the asset bubble bursts, and its prices reduce to a level that more accurately reflects its intrinsic value. Financial bubbles are typically attributed to a sudden change in investor behaviour, in which hypes, excessive speculation and the strong desire to ‘jump on the bandwagon’ of a certain trending asset play a part. In this article, let’s explore the potential causes of a financial bubble.

For a comprehensive history of financial bubbles, check out this comprehensive timeline by DailyFX.


The Causes of Financial Bubbles

More often than not, bubbles start as the result of seemingly sensible economic motivations. For instance, in the early 2000s, low interest rates and economic prosperity encouraged many individuals in the United States to purchase a house. In the 1990s, web stocks offered some great opportunities for growth for Dot Com businesses. Nonetheless, strongly rising prices and a great degree of optimism in the market can create a situation in which individuals take more risks and asset prices rise more than they reasonably should. A few factors that can cause financial bubbles:

  • Monetary policy - Now and again, bubbles happen as an indirect result of financial policies such as low interest rates, which tend to result in excessive spending.
  • Herding behaviour. Investors, as all other people, look up to authority and are quick to assume that the majority can’t be wrong. That is why financial bubbles can be triggered when banks and influential leaders in the financial space openly start investing in certain assets.
  • Irrational exuberance. When there is a strong but largely unfounded optimism in the market, investors can feel a strong psychological pressure to invest in an asset irrespective of its actual value, as the general assumption is that prices will keep rising. The Tulip Mania of 1637 is a good example of irrational exuberance.
  • Cognitive dissonance. When confronted with news that disproves their believes (e.g. that  the market is going to grow forever), investors may have a tendency to filter out this bad news and look for reassurance instead.
  • Financial instability hypothesis. In a nutshell, periods of economic growth can cause people to be increasingly reckless with their investing decisions.
  • Short-termism. People tend to be tempted by short-term gains rather than long-term profitability, which can lead to trends and decisions that aren’t sustainable.
  • Expectations based on the recent past. Past performance is no guarantee of future results. Despite of that, investor decisions are often made based on recent developments in the market rather than long-term thinking.
  • Hoping to beat the market. Even those who are aware of the potential backlash of financial bubbles may sometimes choose to invest in these unsustainable bull markets hoping they can get out before the market crashes.
  • Trade deficits. When a country has a trade deficit, it can start to attract significant money inflows, leading to a high demand for securities, skyrocketing prices and potentially financial bubbles.

This is a short summary of the potential causes of financial bubbles. Once you are aware of their potential causes, it’s easier to avoid losses due to an asset bubble crash.

By Travis Bard

© 2020 Copyright Travis Bard - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in