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Related, but; "speculation" is defined as the expectation that the residual price of an asset will be higher than the cost of buying it. Bubble can be defined

• eru 3y ago
  > Related, but; "speculation" is defined as the expectation that the residual price of an asset will be higher than the cost of buying it. That's a very impoverished definition. It leaves out speculating on falling prices by short-selling. Or speculating on (or against) volatility, instead of a specific price move. Or speculating that certain correlations will stay relevant (or will cease being relevant). > Bubble can be defined as when the general price level in a market is decided mainly by speculation. Speculators try to guess at future conditions and benefit from anticipating them today. If they anticipate a lower price in the future, they might short sell. If they anticipate a higher price they might buy. Acting on the expectation tends to bring the anticipated future price into the present. But there's no reason it should be particularly high or particularly low. Financial markets are all about this kind of anticipation. Eg you buy a zero coupon bond, because you expect it to be more valuable in the future than today. That doesn't mean zero coupon bonds are always in some kind of bubble. See also https://ms.mcmaster.ca/~grasselli/Garber89.pdf https://ms.mcmaster.ca/~grasselli/Garber89.pdf for an investigation into how the old story of the prototypical bubble, the Dutch Tulip Mania, doesn't hold up to scrutiny.