What is an economic bubble?

Abubble as an economic season with a very fast increase in the asset prices with subsequent shrinkage of the economy. Bubble creation occurs when there is inrush in the asset prices unwarranted by the asset's primary principle and facilitated by free-market behavior. An overwhelming sell-off occurs when investors are not willing to buy at the super increased price leading to the deflation of the bubble.

The change of investors behaviors causes the formation of bubbles in economies, securities, stock markets, and business sectors. The changes can be existing and real as Japans bubble of the 1980s during the partial regulation of banks or pattern shift that happened during 1990s and first quarter of 2000 dot-com boom. There were high sales of high priced stocks during the boom anticipating higher selling prices until the confidence in the forecasts were lost leading to the huge shrinkage occurs as a market correction. There is asset transfer to areas with higher growth as a result of bubbles in the equity market and economies. There are asset movements towards the end of the bubble causing the deflation of prices.

Five stages of a bubble by Economist Hyman P. Minsky, the first to explain the growth of financial instability and its relationship it has with the economy. The bubbles cycle is consistent even though there is variation in the cycles interpretation. The steps include: 

Displacement This is the first stage when the investors attention is drawn by the paradigm such as product, technology, historically low-interest rates and other attention-drawing things. 

Boom After the investors attention drawn, more investors get into the market resulting to the increase in the prices and as more investors get in and the prices steadily increase reaching the highest maximum price resulting to more assets being bought. 

Euphoria This is a stage of excitement and joy in the market as prices skyrocket and people confidence in the increases. 

Profit taking This a stage where people see the warnings will start to sell off the assets at high prices and make a profit even though the warnings of the bubble bursting is difficult to see and notice.

There are two consequential bubbles in the previous history: the 1190s dot-com bubble and the housing bubble that occurred between 2007 and 2008. In addition to these, the first bubble that occurred from 1634 to 1637 gives applicable experimental lessons.

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