99
See also: Supply and demand 108–13 ■ Behavioral economics 266–69 ■ Bank
runs 316–21 ■ Global savings imbalances 322–25
INDUSTRIAL AND ECONOMIC REVOLUTIONS
tulips, their appeal diminished, and
people realized the folly could not
continue. Selling became more
frantic, confidence plummeted, and
the price of tulips collapsed. For
those who had borrowed money to
invest, it was disastrous.
How bubbles form
US economist Peter Garber claimed
that speculators in these situations
buy an asset in the full knowledge
that the price is far above any
“fundamental value” but do so
This leads share prices
to rocket.Many believe the
escalation will continue,
and get very excited.The situation is widely
discussed in the media and
at informal gatherings.Prices become
unsustainably high,
confidence is destroyed, and
the market crashes.They buy hugely
overpriced shares
(or the overpriced
product itself).News of this unusual
state of affairs reaches
the general public.Sometimes extraordinary
conditions occur that
overinflate prices in
an industry.21st-century bubble
The Dotcom Bubble, which
burst in March 2000, was the
first of the 21st century. It had
the classic bubble hallmark of
prices being driven purely by
speculation rather than by
changes in real value (based
on output or assets). Investors
assumed that the world was
about to be changed forever
by the internet, so investing in
e-commerce seemed to be a
once-in-a-lifetime opportunity.
The new companies had no
trading history, very low sales,
and virtually no profits, yet
they attracted hundreds of
billions of dollars in investment.
The crowd believed that every
firm was potentially the next
AOL, a firm whose clients
jumped from 200,000 to one
million in two years, and then
climbed at around a million
new users each month. Greed
overcame fear and people
rushed to invest. Between
March 2000 and October 2002,
more than $7 trillion was
wiped off the market value
of dotcom shares.because they expect prices to rise
still further before they eventually
crash. Since prices cannot rise
forever, this involves the irrational
belief “that the guy you will sell to is
dumber [than you] and will not see
the crash coming.” However, Garber
believes sometimes there are real
reasons behind the price rises—
such as a fashion for ladies in
France to wear rare tulips on their
dresses. Nonetheless, in any bubble,
the advice remains the same:
“Let the buyer beware.” ■The Dotcom Bubble peaked in- Price rises were so extreme
that people everywhere discussed
them at dinner tables—a sure sign
that a bubble is about to burst.
VALUECrowds breed
collective insanity.1994 1998 2002 2006