Speculative bubbles ultimately burst, leading to wealth destruction and economic pain from "summary" of A Short History of Financial Euphoria by John Kenneth Galbraith
Speculative bubbles, those periods of collective self-deception, are a recurrent feature of financial history. The phenomenon typically involves the overvaluation of assets to the point where their prices bear no relationship to their intrinsic value. The seeds of these bubbles are sown in the fertile ground of human nature, particularly our tendency towards greed and the desire for easy wealth. When prices rise beyond reason, investors become increasingly convinced of the merits of their investments, perpetuating the cycle of euphoria. As the mania reaches its peak, even the most seasoned investors can become caught up in the frenzy. The fear of missing out on potential profits drives individuals to invest in assets they know little about, simply because others are doing the same. The market becomes detached from reality, with prices continuing to climb to unsustainable levels. This disconnect between price and value can only persist for so long before the bubble inevitably bursts. When the bubble finally does burst, the consequences are severe. Prices plummet, wiping out vast amounts of wealth in a matter of days or even hours. The pain is not limited to investors, as the broader economy suffers from the fallout of the burst bubble. The destruction of wealth has a ripple effect, leading t...
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