how a bubble works
an economic bubble occurs any time that the price of a good rises far above the item s real value bubbles are typically attributed to a change in investor behavior although what causes this change in behavior is debated bubbles in equities markets and economies cause resources to be transferred to areas of rapid growth at the end of a bubble resources are moved again causing prices to deflate the japanese economy experienced a bubble in the 1980s after the country s banks were partially deregulated 1 this caused a huge surge in the prices of real estate and stock prices the dot com boom also called the dot com bubble was a stock market bubble in the late 1990s it was characterized by excessive speculation in internet related companies 2 during the dot com boom people bought technology stocks at high prices believing they could sell them at a higher price until confidence was lost and a large market correction occurred investopedia julie bangthe research of american economist hyman p minsky helps to explain the development of financial instability and provides one explanation of the characteristics of financial crises through his research minsky identified five stages in a typical credit cycle 3 while his theories went largely under the radar for many decades the subprime mortgage crisis of 2008 renewed interest in his formulations which also help to explain some of the patterns of a bubble this stage takes place when investors start to notice a new paradigm like a new product or technology or historically low interest rates this can be basically anything that gets their attention prices start to rise then they get even more momentum as more investors enter the market this sets up the stage for the boom there is an overall sense of failing to jump in causing even more people to start buying assets 