Economics

Bubbles Spread Like a Zombie Virus

The frenzy jumps from neighbor to neighbor.

It's a reach for me to buy.

Photographer: Ollie Millington/Getty Images

The leading academic theory of asset bubbles is that they don’t really exist. When asset prices skyrocket, say mainstream theorists, it might mean that some piece of news makes rational investors realize that fundamental values like corporate earnings are going to be a lot higher than anyone had expected. Or perhaps some condition in the economy might make investors suddenly become much more tolerant of risk. But according to mainstream theory, bubbles are not driven by speculative mania, greed, stupidity, herd behavior or any other sort of psychological or irrational phenomenon. Inflating asset values are the normal, healthy functioning of an efficient market.

To continue reading this article you must be a Bloomberg Professional Service Subscriber.