Understanding the bubbles: Vilfredo Pareto and beyond

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Abstract

Understanding how and why bubbles occur as well as whether these could be anticipated, managed, or even prevented is equally important as to know how to recover from them. To address these questions, a model of bubble emergence is put forward. The model builds on two fundamental commonalities that are identified to exist between the Internet and housing market bubbles: uncertainty and sentiments. The iteration between uncertainty and sentiments leads to the emergence of the third commonality: residue. The residue is the difference between the actors’ overall sentiment about exaggerated future prospects of a new venture and intended outcomes of that new venture; the higher the residue, the higher the likelihood of the bubble emergence; as residue increases, the likelihood of bubble burst increases. One question that arises is whether one can manage the hype, hence the residue. In this, it is maintained all boils down to the role pricing plays vis-à-vis the emergence of a new venture and its perceived value. Being in the midst of the global economic crisis provides us with a unique opportunity to refine the proposed model, especially by understanding its temporal and contextual boundaries.
Original languageEnglish
Publication date2010
Publication statusPublished - 2010
EventAfter the Gold Rush: Economic Crisis and Consequences - , Iceland
Duration: 27 May 201028 May 2010

Conference

ConferenceAfter the Gold Rush: Economic Crisis and Consequences
Country/TerritoryIceland
Period27/05/201028/05/2010

Keywords

  • bubbles

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