A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation.
Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly predictable experimental markets. In the laboratory, uncertainty is eliminated and calculating the expected returns should be a simple mathematical exercise, because participants are endowed with assets that are defined to have a finite lifespan and a known probability distribution of dividends. Other theoretical explanations of stock market bubbles have suggested that they are rational, intrinsic, and contagious.
Read more about Stock Market Bubble: Examples, Whether Rational or Irrational, Positive Feedback, Effect of Incentives
Famous quotes containing the words stock, market and/or bubble:
“Death and life were not
Till man made up the whole,
Made lock, stock and barrel
Out of his bitter soul,”
—William Butler Yeats (1865–1939)
“The only reason to invest in the market is because you think you know something others don’t.”
—R. Foster Winans (b. 1948)
“Each swung in danger on its slender twig,
A bubble on a pipestem, growing big.”
—Robert Frost (1874–1963)