Asset bubbles can arise because markets ignore fundamentals and base decisions on future expectations of themselves and others.

Question

Quizplus · Accepted Answer

Asset bubbles occur when market participants drive up the price of an asset beyond what would be justified by its underlying fundamentals. This can occur when investors have optimistic expectations about the future growth or value of the asset, and base their decisions on these expectations rather than objective data such as earnings or cash flow. As more investors follow suit and buy into the asset, the price rises further, reinforcing the belief that the asset is worth more than it actually is. Eventually, the bubble bursts as investors come to realize that the asset is overvalued, causing prices to crash and resulting in significant losses for those who bought in at the peak.

Asset Bubbles Can Arise Because Markets Ignore Fundamentals and Base