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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.
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