What Are Economic Bubbles, and What Causes Them to Burst?

economic bubble

In the year 2000, every investor on the planet was obsessed with the internet. As companies launched websites with storefronts selling products to millions of customers, financial professionals and amateur investors alike did anything and everything to get their hands on their stocks. The fact that most of these companies weren’t anywhere near profitable didn’t matter. They simply wanted to get in on the “next big thing.”

Unfortunately, most of those websites and online companies turned out to be a total bust. Some companies valued in the hundreds of millions lost that value nearly overnight. Others were bought out by much larger companies for a fraction of what they were originally worth. As it turned out, just because these companies looked cool didn’t mean they were valuable, functioning organizations, and many realized this when it was too late. This is what economists refer to as the “dot com” bubble bursting.

Yet how did these companies get to be so overvalued to begin with? Better yet, how long has this practice of overvaluing worthless companies and products gone one for? TED-Ed’s Prateek Singh recently reported on just what causes these economic bubbles in the first place…and why they always end up bursting.

Are we currently in an economic bubble? That’s debatable. Certain retail CEOs seem to think their industry’s sudden downsizing was caused by the building of too many retail locations in the last 20 years, which could cause a bubble. Other investors believe the rush for tech startups to go public could cause a tech bubble similar to that of the early ’00s. While nothing has “burst” yet, one thing’s for sure: if you’re going to invest in something, make sure that what they’re selling has a realistic value and not one blown out of proportion by hype. If you invest in, say, the next Pets.com, you’re going to be in for a world of hurt.