Knowra Economic bubble Economic bubble An economic bubble is a rapid rise in asset prices driven partly by expectations of further increases, followed by a sharp decline when those expectations collapse.
Feedback loop : A process in which an initial change produces effects that reinforce or counteract that change. Rising prices can attract buyers, whose purchases push prices higher and strengthen expectations.
Tulip mania : A speculative boom in Dutch tulip bulbs during the 1630s, followed by a collapse in bulb prices. It is an early, widely cited example of speculative trading around an asset.
Charles Mackay : A Scottish journalist whose 1841 book chronicled episodes of collective speculation and public delusion. His account helped make historical manias a familiar way to interpret bubbles.
Fundamental analysis : A method of valuing an asset by examining expected cash flows, risks, and economic conditions. It estimates value from underlying prospects rather than from expectations of resale alone.
Financial crisis : A severe disruption in financial markets or institutions that impairs credit, payments, or confidence. A bubble's collapse can become systemic when losses undermine lenders and market functioning.
Greater fool theory : The idea that an asset can be bought above its fundamental value if a later buyer is expected to pay more. It explains why buyers may keep bidding up assets despite doubts about their underlying value.
South Sea Bubble : A British stock-market boom centered on the South Sea Company that collapsed in 1720. It shows how promotion, political ties, and speculation can inflate company shares.
John Maynard Keynes : A British economist whose work emphasized uncertainty, conventions, and expectations in economic decisions. His analysis of conventions helps explain why investors can follow prevailing market beliefs.
Efficient-market hypothesis : The hypothesis that asset prices incorporate available information, making persistent risk-adjusted excess returns difficult to obtain. It challenges simple claims that market prices can remain predictably detached from information.
Balance sheet recession : A downturn in which households or firms prioritize debt repayment over spending after asset values fall. Falling collateral can leave borrowers focused on repairing finances rather than investing or consuming.
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