Financial market bubbles are recurring, often painful, reminders of the costs and benefits of capitalism. While many books have studied financial manias and crises, most fail to compare times of turmoil with times of stability. In Bubbles and Crashes, Brent Goldfarb and David A. Kirsch give us new insights into the causes of speculative booms and busts. They identify a class of assets—major technological innovations—that can, but does not necessarily, produce bubbles. This methodological twist is essential: Only by comparing similar events that sometimes lead to booms and busts can we ascertain the root causes of bubbles.
Using a sample of eighty-eight technologies spanning 150 years, Goldfarb and Kirsch find that four factors play a key role in these episodes: the degree of uncertainty surrounding a particular innovation, the attentive presence of novice investors, the opportunity to directly invest in companies that specialize in the technology, and whether or not a technology is a good protagonist in a narrative. Goldfarb and Kirsch consider the implications of their analysis for technology bubbles that may be in the works today, offer tools for investors to identify whether a bubble is happening, and propose policy measures that may mitigate the risks associated with future speculative episodes.
About the authors
Brent Goldfarb is Associate Professor of Strategy and Entrepreneurship and the Academic Director at the Dingman Center for Entrepreneurship at the University of Maryland’s Robert H. Smith School of Business.
David A. Kirsch is Associate Professor of Strategy and Entrepreneurship at the University of Maryland’s Robert H. Smith School of Business.
“Goldfarb and Kirsch possess a keen understanding of the history of technological innovation and the evolution and implementation of new technologies and their respective impact on society. Their work sheds light on causal factors that were not previously well understood with respect to technological innovation and the underlying dynamics which lead innovation to spawn speculative bubbles. Bubbles and Crashes provides important insights for both investors and policy makers to recognize bubbles and implement policies to minimize their impact.”
—Jonathan Rosenberg, Senior Vice President, Alphabet
“A fascinating account of how and when new technologies lead to exuberant asset prices. Anyone who thinks about innovation and financial markets will enjoy this book.”
—Jonathan Levin, Stanford Graduate School of Business
“Strongly grounding their work in historical evidence, Goldfarb and Kirsch advance our understanding of how technological innovations sometimes do, and sometimes don’t, lead to financial bubbles. They move the discussion of bubbles and crashes away from journalism and toward science. Investors and finance professionals along with financial regulators and policy makers need to absorb the lessons of this provocative analysis.”
—Richard Sylla, New York University
“What an engaging book! Why do booms and busts happen during the deployment of some technologies and not others? The work looks deeply at many memorable episodes of new technologies – electric lighting, vulcanized rubber, insulin, telephony, radio and television, electronic commerce, and much more. The authors bring accessible and penetrating insight to the economics, and illustrate with rich examples. It is a joy to read to read the stories and analysis. Highly recommended!”
—Shane Greenstein, Martin Marshall Professor of Business Administration, Harvard Business School
“When is a technology boom actually a bubble? In Bubbles and Crashes authors Goldfarb and Kirsch deliver a nuanced guide to answering this question. Based on the careful examination of 88 important innovations—ranging from the electric light to the World Wide Web—they demonstrate the importance of pure-play investment opportunities, naive investors, and powerful narratives in allowing runaway speculation that overwhelms the moderating forces of imitation, entry, and competition. This is must reading for anyone interested in how new technologies develop, how they are perceived when they first occur, and how some generate clear bubbles.”
—Richard Rumelt, Professor Emeritus, UCLA Anderson