Simply put, a financial bubble is caused when an asset is traded at a price well above its true value. Often compounded by wider societal and political issues, trading and investing in that asset becomes frenzied until the bubble ‘bursts’ and prices crash.
As Warren Buffett so succinctly explained: price is fundamentally different from value – but the two are often wrongly used interchangeably. In a financial bubble value and price for a particular asset, or assets, become disconnected and as prices rise, individuals believe the value of that asset is rising too. But that is not the case, as history shows...