Then, what is actually price (or economic) bubble?
I found a very simple illustration based on the recent events in Japan.
 |
| Japanese 'Land prices' bubble |
The curve depicts the bubble growing from 1980 till 1991-1992, then shutting down by 2005. Everything under the curve is the questionable value or the overhead of funds. The depicted graph above shows a rather slow sloping down. Often bubble closes slower than grows, example the gold price bubbles. However, sometimes bubbles bust like the one of Brent Crude oil presented below.
 |
| 'Brent Crude' bubble |
What is the driving force of a bubble?
There are many answers to the question, but I catch on the common axis - People.
People with their relations, notions and interactions cause the bubble phenomena. Among them are investors, speculators, and common people.
Why they do this? The answer gives the greater fool theory (also called survivor investing behaviour). It is all about the belief by one who makes an investment on the assumption that there will be "a greater fool" to sell the assets/securities off to. In other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price.
Thus, the more people participate, the more amplitude the wave has, the easier smart guys make their money out of the losses of the rest. So it comes now to the smart guys that use social psychology and human behavioural patterns to benefit.
Who are the smart guys?
The answer to the above question is also easy to find out. Just have a look at the same Brent price pulse overlaying a so-called theoretical bubble pattern.
 |
| Brent bubble matches the theoretical pattern |
This is so far the only example known to me that the actual curve matches the theoretical bubble so closely. Presume that there should be more, basis which the theoretical curve was derived. A study of the theoretical bubble discloses the names of the smart guys.
 |
| Economic bubble in theory |
The guy with the smart money is Mr. Investor in a Greater Fool. Contrary to to the contrarian investing the greater fool investors count on greed and psychology, i.e. on the same grounds that bear financial pyramids.
What will be the conclusions of my review?
1. Perhaps that knowledge helps in many cases to avoid being a greater fool.
2. It may help to find the mean trend masked by the bubble's crest.
3. It can help to plan the investment allowing for less risk.
P.S.
Additionally for the Russian speaking readers of this post I provide the last diagram in Russian.
