23 December 2021

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The speculative bubbles

Author: Luigi Campopiano

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Pictet Asset Management defines the speculative bubble as a considerable (and often unjustified) increase in the prices of an asset deemed innovative or profitable, which causes a surge in demand in a short period. But how many are there in the history of investments?

Among the best known speculative bubbles (and among the first in modern history) are:

• The tulip bubble in seventeenth-century Holland. Following the introduction of the tulip in the Netherlands and its consequent recognition as a flower symbol of high social status, the price of tulips increased exponentially due to speculation on the bulbs that have just been planted or about to be planted. Prices continued to rise, filling the pockets of tulip traders and selling for 6,000 florins (the average annual income was about 150 florins). But in 1637, suddenly, prices reached their peak and, no longer meeting demand, traders began to sell, causing the bubble to burst;

• The railway boom in 1840 in England and the United States;

• The boom of cars and radios in 1920;

• The boom of electronic transistors in 1950;

• The boom of home computers and biotechnology in 1980;

• The Dotcom bubble at the turn of the 2000s.

That of speculative bubbles is, therefore, a recurring phenomenon in the history of investments. Many today wonder if the US tech sector is not the next to show a sequence of events similar to a speculative bubble destined, sooner or later, to explode. However, in order not to fall back into the same mistakes, savers can learn from the past, remembering that the main ingredient for each bubble is the attitude of individuals to implement imitative behaviors that follow the actions of other investors or public opinion: knowing the psychological dynamics behind investment decisions