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What is an economic bubble? It means that a certain kind of financial asset, for example, stock or real estate, which attracts many investors and drastically increases in price for a short time. The sharp rise in the prices of financial assets causes a lot of money to flow into a particular industry, leading to this industry’s prosperity. This kind of prosperity is like a bubble in a bath. It seems that the market is prosperous, but actually, it is an illusion. When the market cools down and people withdraw their investments, the asset prices will collapse. The financial sector calls this false prosperity an economic bubble. The author of this book, Robert J. Shiller, believes that the main reason for economic bubble formation is the collective irrationality of human beings, so he calls the economic bubble "irrational exuberance."
Professor Shiller categorized the precipitating factors of "irrational exuberance" into structural factors, cultural factors, and psychological factors. Firstly, "irrational exuberance" is influenced by structural factors such as political policies, industry development, population size, investor psychology, the growth of mutual funds, the expansion of the volume of trade and so on. It is also fueled by the "amplification effect" of the market. Secondly, from a cultural point of view, the news media and the zeitgeist play a significant role. Finally, from a psychological point of view, these various factors can not affect the market unless human "psychological factors" are also involved.
