A basic characteristic of financial bubbles is the suspension of disbelief by most participants when the speculative price surge is occurring: It's only in retrospect after the bubble has burst, that they're recognized.

The fact is that financial bubbles throughout history display almost metronomic regularity. Some asset class, often a product of new technology or financial innovation, becomes fashionable, and prices rise rapidly as demand outstrips supply. Excitement over early riches leads to speculation that the normal economic rules have changed, thereby justifying valuations that are based largely on assumptions about future profits. As prices balloon well beyond early investors’ wildest dreams, disagreement over the correct measure of value increases. Then, finally, some adverse event that might normally have little impact triggers a downward spiral of selling, often accompanied by outright panic.


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