Lecture 12: Bubbles. Flashcards
(13 cards)
What is a bubble in financial markets?
A situation where asset prices rise significantly above their fundamental value, often driven by investor sentiment or psychological biases.
Are bubbles always irrational?
Not necessarily — they may arise from rational behavior under asymmetric information, limits to arbitrage, or market frictions.
What is the “greater fool theory”?
Buying overpriced assets hoping to sell them later to someone else at a higher price before the bubble bursts.
Name two famous historical bubbles.
Tulip Mania (1630s) and Dot-com Bubble (1990s–2000).
What behavioral biases contribute to bubbles?
Overconfidence, Herd behavior, Optimism, Limited attention, Greater fool logic.
What experimental evidence shows bubbles can form in lab settings?
Smith et al. (1988): Even when participants know the asset’s fundamental value, prices can rise above it.
What role does experience play in experimental markets with bubbles?
Experienced traders or financially literate participants are less likely to fuel bubbles.
What did Ackert et al. (2006) find about short-selling and bubbles?
Bubbles are more severe when short-selling is restricted — pessimists can’t act on their beliefs.
How does overconfidence amplify bubbles?
Overconfident traders overestimate their valuation skills and bid up prices, especially when pessimists are sidelined.
What is the impact of gender on bubble formation (Eckel & Füllbrunn, 2015)?
Markets with all-male participants had stronger bubbles than mixed or all-female groups.
Can bubbles be identified in real time?
It’s difficult — often only clear in hindsight. However, signs include extreme valuations, leverage, and public euphoria.
What is a recent example sometimes labeled a “FOMO bubble”?
The rapid post-COVID recovery in 2020–2021, especially in tech and growth stocks.
What is the role of short-selling constraints in bubble formation?
They prevent pessimists from correcting overvaluation, allowing bubbles to persist or grow.
