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.

Examples

Some of those bubbles are created because of intense and excessive speculation on a new technology or service. The dot-com boom of the late 1990s is one example. The biotech boom in the 1980s is another. Still other examples of stock market bubbles include Japanese stocks in the late -1980s, Nifty 50 stocks in the early 1970s, and Taiwanese stocks in 1987.

A stock market bubble may set the stage for a later stock market crash, continuing our example, the Stock Market Crash of 2002.

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 .

See also

• Behavioral finance
• Tulipomania
• South Sea Bubble
• Mississippi Scheme
• Railway mania
• Stock markets
• Dot-com
• Financial markets
• Poseidon bubble

External links

Accounts of the South Sea Bubble, John Law and the Mississippi scheme, and the tulipomania can be read in Charles MacKay 's classic Extraordinary Popular Delusions and the Madness of Crowds (1841) - available for free download from Project Gutenberg.