An investment bubble is a situation where goods or services are traded in high volumes at prices that are considerably at variance with intrinsic values. It could also be described as a trade in products or assets with inflated values.
An investment bubble happens when groups of like minded investors rush to invest in goods or assets with inflated prices. This further inflates the prices until an event triggers a crash, metaphorically, bursting the investment bubble that built up over a period of time.
An investment bubble is hard to explain. There are various factors that cause a bubble and there is no one particular reason to trigger it. This is so because bubbles appear without any certainty, speculation, or rationality. It has also been suggested that bubbles might ultimately be caused by processes of price coordination or emerging social norms.
Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often conclusively identified only in retrospect, when a sudden drop in prices appears. Such a drop is known as a crash or a bubble burst.
Prices in an economic bubble can fluctuate erratically, and become impossible to predict from supply and demand alone.
Inequality and investment bubbles: A clearer link is established
"Money, it's a gas," says the sixties rock group Pink Floyd in their song "Money." Indeed, physics professor Victor Yakovenko is an expert in statistical physics and studies how the flow of money and the distribution of incomes in American society resemble the flow of energy between molecules in a gas. In his lectures delivered on April 19 at New York University and April 20 at the New School for Social Research, Yakovenko brought his physics-of-incomes study up to date, including a report on the correlation between levels of income inequality and the appearance of financial downturns, such as the dot-com bubble of 2000 and the more recent housing bubble of 2008.
