The Importance Of An Economic Bubble

INTRODUCTION - Bubbles

An economic bubble is a phenomenon where market activity is heightened because of high expectations of returns, and optimism about potential returns due to technological advancement or discovery or due to anticipation of wealth creation because of disruption caused by innovative technology and/or the emergence of new markets.

In an economic bubble, the public has high expectations of growth and returns on investments, which leads to excessive investor interest and participation. Since this investment increases the perceived values of companies, it induces more people to invest, and as such, financing activity in the sector increases to an unrealistic level, thus creating a so-called “bubble”. 

Due to the lack of understanding

Since the technology was such a major advance in the eyes of the public, the speculation was that the internet sector was about to boom, and that lead to various investors to start buying shares of web based companies. Now, the business model of these companies required them to operate on sustained net loss so as to gain a consumer base that they intended to charge for their services later on. As a result these businesses were making no profits, and yet, their stocks kept rising because the public was being given the advice to invest in these dot com companies by all investors and media publications such as the Wall Street Journal, and Forbes Magazine[https://en.wikipedia.org/wiki/Dot-com_bubble]. This led to excessive investment by the public. Many entrepreneurs in the field became instantly wealthy, and because of the overconfidence they derived from the public, these companies started to obscenely spend money on their staff, and management, all the while making no profits and burning through cash very quickly. Any company with an ‘e’ as a suffix or with ‘.com’ as a prefix, was instantly given public confidence, and undeservedly so. There was a gross, if not obscene, overvaluation of companies that had never made and were never going to make any profitable returns. This was majorly due to the faulty business models of these companies and how they

Suddenly, investors realised that the companies they were investing in were hollow promises, and this loss of confidence led to all of the investors to start liquidating their shares, and this led to the crash. Now, when an investor has made money in the stock market, they tend to feel wealthier, and with the advent of a crash, they tend to tighten their purse strings. This led to a lot of people spending lesser money, which further perpetuated the misery of the crash. The people started referring to dot coms as dot bombs. As a result of the crash inquiries were made into matters by the securities exchange commission and findings shed light on the gross misuse of shareholders’ fund and this led to many CEOs and managers of companies being charged with fraud and tried in