Bubbles and Crashes: The Boom and Bust of Technological Innovation

Financial market bubbles in technology industries are recurring events with significant economic consequences. While many books examine financial manias and crises, most do not compare periods of turmoil with periods of stability. Bubbles and Crashes examines the causes of speculative booms and busts by studying major technological innovations—a class of assets that can, but does not necessarily, produce bubbles. Using a sample of eighty-eight technologies spanning 150 years, Goldfarb and Kirsch identify four factors that play a key role in bubble episodes: the degree of uncertainty surrounding a particular innovation; the presence of novice investors; the opportunity to directly invest in companies specializing in the technology; and whether a technology functions as a compelling narrative. The authors consider implications of their analysis for current technology bubbles, provide tools for investors to identify whether a bubble is occurring, and propose policy measures to mitigate risks associated with future speculative episodes.