This is a Guest Post by AK of Fallible
Why are people so shocked when financial asset bubbles pop? That’s what bubbles are supposed to do right? In this video we’re going to dive into how bubbles form and why the eventually bust. And it’s all going down on this week’s episode of Real Vision’s The One Thing.
The economist Hyman Minsky broke down the life of a bubble into 5 stages.
The first stage is called displacement. This is when investors start falling in love with some new, sexy shift in the market… like a new technology.
Stage 2 is the boom phase. This is where prices start gaining momentum and rise faster because more people are paying attention.
Stage 3 is euphoria. This is where people go wild and buy, buy, buy with no restraints, and prices skyrocket.
Stage 4 is the profit taking stage. This is where the actual smart investor start cashing in before the party stops.
And we enter stage 5 — the bust. This is when the bubble pops, reality sets in, and prices crash hard back to earth.
Markets are driven by people. And people are driven by emotions, not logic.
That’s why we get massive booms and busts.
And we’ve been getting them forever, because people never change.
The first recorded bubble was in Holland during the 1600’s and it was all about Tulips. Tulip mania got so insane that the Dutch were trading away 12 acres of land for just one to two tulip bulbs.
And of course this bubble eventually popped, and within a few months of the top, tulip prices fell by 99%.