Economic Bubble
A rapid surge in asset prices far above intrinsic value driven by speculation, followed by a sharp collapse.
What is Economic Bubble?
An economic bubble is a market phenomenon in which the prices of assets — stocks, real estate, commodities, or currencies — rise dramatically above their intrinsic or fundamental value, fueled primarily by speculative buying and irrational exuberance rather than by underlying earnings, rents, or utility. Bubbles typically pass through five stages: displacement (a new innovation or trend emerges), boom (early adopters profit and attract attention), euphoria (widespread FOMO drives prices to extreme levels), profit-taking (smart money exits), and panic (prices collapse rapidly as buyers disappear). Bubbles are difficult to identify in real time but obvious in hindsight. Famous examples include the Dutch Tulip Mania (1637), the dot-com bubble (1995–2000), and the US housing bubble (2002–2008).
Example
The Nasdaq Composite rose from 1,000 to over 5,000 between 1995 and March 2000 as investors bid up internet companies trading at hundreds of times revenue with no profits. When the dot-com bubble burst, the index fell 78% by October 2002, wiping out approximately $5 trillion in market value. Many companies with speculative valuations — Pets.com, Webvan, eToys — went bankrupt within months of their IPOs.