If we burn our hands on a hot stove, we probably won’t touch another anytime soon. If we see someone else burn their hands on a hot stove, we can learn the same lesson but without the painful cost. History, in its own way, is a treasure trove of other people’s mistakes. If we heed the lessons of the past, we might be able to save ourselves from painful experiences in the present.
This post will focus on the mistakes littered throughout economic history: booms, manias, bubbles, and the eventual busts. An asset bubble occurs when the price of a financial asset rises to levels well above its intrinsic value. Robert Shiller, in his book Irrational Exuberance, describes it this way: