Stock market bubble

A stock market bubble is a type of economic bubble taking place in stock markets, in which a wave of public enthusiasm, evolving into herd behavior, causes an exaggerated bull market . When such a bubble takes place, market prices rise dramatically, making the listed stocks significantly overvalued. Generally stock market bubbles are followed by stock market crashes.

A rational or irrational phenomenon?

Emotional and cognitive biases (see behavioral finance) seem to be the causes of bubbles. But, often, when the phenomenon appears, pundits try to find a rationale, so as not to be against the crowd. Thus, sometimes, people will dismiss concerns about overpriced markets by citing a new economy where the old rules of investing may no longer apply. This type of thinking helps to further propagate the bubble whereby every one is investing with the intent of finding a greater fool.

Related Topics:
Behavioral finance - New economy - Greater fool

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