Behaviour
Bubble
A price rise driven by expectations of further rises rather than by underlying value.
How it works
Bubbles share a structure: a plausible story, easy credit, new participants, and a shift from valuing an asset to valuing the fact that it is going up.
They are difficult to identify with confidence in advance, since high prices are sometimes justified. They are unmistakable afterwards.
Where it misleads people
Bubbles last far longer than sceptics expect, and shorting one early is a reliable way to lose money while being eventually right.
Related terms
- HerdingFollowing what others are doing rather than reaching your own conclusion.
- Fear of missing outBuying because something is rising and others are profiting, rather than because of any analysis.
- Mean reversionThe tendency of extreme values — margins, multiples, returns — to drift back towards long-run averages.
- Short squeezeA sharp price rise caused by short sellers being forced to buy back at once.
More in Behaviour
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.