After all, isn’t pretty much everything just worth whatever people are willing to pay for it?
In: Economics
An economic bubble is characterized by an increase a significant increase in price (possibly over a long period of time) that eventually reaches a point where there is a sudden collapse (which can be triggered by many things) and the price plummets.
One theory is that bubbles happens is when too many people overvalue the intrinsic value of something to the extend you reach an unstable situation.
For example, in the housing crisis in the mid 2000’s, a number of factors drove up the demand of houses: lower interest rates easy-to-get mortgages. This increase in demand drove up house prices. Eventually when people couldn’t pay their mortgages, the banks had to foreclose. Suddenly supply drives through the roof and demand sinks, and the bubble collapses.
The problem is, you really can’t know you’re in a bubble when you’re in one. It’s more of a description of an economic phenomenon after it happens. That doesn’t stop people from trying to predict whether we are in one, based on their own theories about an asset’s intrinsic value and what they *think* it is worth.
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