Why do market bubbles burst?
Show answer & explanation
Answer: Prices exceed basic value
Bubbles are illegal speculation — Wrong. Bubbles aren't illegal, just irrational price increases driven by speculation. They form when optimism and 'fear of missing out' drive prices far above basic value. Eventually, reality reasserts itself and prices crash.
Everyone sells at same time — Wrong. Mass selling does happen when bubbles burst, but that's the mechanism, not the cause. Bubbles burst because prices rise far beyond what underlying value justifies, making the market vulnerable to any trigger that causes sentiment to shift.
Prices exceed basic value ✓ — Correct! Bubbles form when prices rise far above intrinsic value due to speculation, herd mentality, and 'greater fool theory' (buying overpriced assets expecting to sell to someone else at even higher prices). Eventually, reality breaks through—earnings don't justify valuations, new buyers dry up, sentiment reverses—and rapid selling crashes prices.