Understanding Technology Bubbles
New Books in Economics
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How to Define a Bubble?
A bubble is when the value of an asset goes beyond its fundamental value. In practice, this is not a very useful definition because at any point in time you can't know what future cash flows will have. So we default to something else, a more practical definition. One is that the price has to be a historical anomaly and if it's two standard deviations from that trend, we're going to call that a bubble. We then go even further afterwards and say, if we can't find a narrative that went along to explain this, we're also not going to call it a bubble.
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