Editor – Srikanth Kumar
The famous saying “The only constant in the world is change” may not be as true as it might sound. For more than 400 years, financial markets have changed drastically, yet the only constant is human behaviour. From the Tulip Mania of 1637 to the Dot-com boom, Bitcoin 2017/2021 and todays’ micro-frenzy has followed the same pattern of humans being driven by beliefs, emotions and crowd following psychology. Learning and understanding our behaviour has proven to be more important than predicting market behaviour today.
What is a Bubble?
An asset bubble occurs when prices rise far above intrinsic value, fuelled by speculation and enthusiasm rather than fundamentals. The result is unsustainable pricing, typically ending in a sharp correction. There’s no universally agreed definition for bubbles, but speculative demand, psychological drivers and amplifiers are markers of the phenomenon. Valuation parameters can help to spot a bubble, but a psychological diagnosis is essential. Bubbles reflect irrational exuberance, putting companies on a pedestal, fear of missing out and in many cases a belief that there is no price too high.
FOMO – The Emotional Fuel of Bubbles
FOMO or the fear of missing out has come to be the psychological engine of every bubble. Jealousy and fear have proven be a better fuel than we ever thought it to be. When early investors make huge gains, the crowd panics, not from fear of loss, but fear of not becoming rich like everyone else. Now, lets talk about some triggers of FOMO:
Viral success stories like “My friend made 10x in one month!” and “My next few days of expenses have been accounted for” lead to more herding.
Media hype and social media narratives create buzz, glorify things and often portrays the beautiful side of things.
Influencers claiming, “This is the future”.
Price charts that go straight up triggers the greed in people who fail to realise that the same chart could be showing an inverse trend too.
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