Bubbles are excessive, irrational pricing of stocks. Are bubbles restricted only to the stock markets? They are ound in other areas of human activities, but since the stock market has a large number of participants, and easy entry norms, bubbles are very prevalent in the stock markets.
How are bubbles created?There are many reasons for bubbles to be created. A new technology, a new buzz word is the story used to sell it. However, there have been bubbles even in seemingly mundane items - commodities, tulips, roads, etc.
One of the main reasons for the creation of an asset price escalation beyond its intrinsic value is - Greed. Greed makes us confident of the future returns of a stock. It shows the posible returns, and pleasures that are available for an investor if he follows the path. it is the trigger that causes the "Fear of missing out". It builds a narrative to
The unpleasant and often undiscused factor that causes asset prices to go up is jealousy. One of the worst of the seven sins, it is jealousy that brings in the late comers to the asset price bubble. There is a constant barrage of news about how other people have become rich and how they are enjoying the gains from their new wealth.
When a person is reminded of how his neighbors have become rich by investing in something, he will become desperate. Desperate minds are raw material for rash investment decisions. It is easy to make a high pricced investment, blinded by jealousy and the desire to match up to someone's wealth.
Every aspiring investor should be aware of envy and jealousy driving their decisions, and try to avoid falling into this trap.
One person who has highlighted this behavior's effect on investors in Charlie Munger.
“Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?” - Charlie Munger.