Stock market bubble

The 1920s saw the widespread introduction of a range of technological innovations including radio, automobiles, aviation and the deployment of electrical power grids.

These hot IPO markets misallocate investment funds to areas dictated by speculative trends, rather than to enterprises generating longstanding economic value.

Emotional and cognitive biases (see behavioral finance) seem to be the causes of bubbles, but often, when the phenomenon appears, pundits try to find a rationale, so as not to be against the crowd.

Thus, sometimes, people will dismiss concerns about overpriced markets by citing a new economy where the old stock valuation rules may no longer apply.

This type of thinking helps to further propagate the bubble whereby everyone is investing with the intent of finding a greater fool.

Still, some analysts cite the wisdom of crowds and say that price movements really do reflect rational expectations of fundamental returns.

In both instances, closed-end country funds and experimental markets, stock prices clearly diverge from fundamental values.

Taking a conservative or contrarian position as a bubble builds results in performance unfavorable to peers.

In attempting to maximize returns for clients and maintain their employment, they may rationally participate in a bubble they believe to be forming, as the benefits outweigh the risks of not doing so.