Bubbles are wonders to behold. They take your breath away and make your pulse race. They make fortunes and – just as fast or faster, in the inevitable stomach-churning crash aftermath – destroy them too. But more broadly, bubbles create important distortions in the wealth (e.g., pensions), psychology, aspirations, policies, and strategies of society as a whole. Bubbles, in other words, have significant social effects and aftereffects.

One would think, given the importance of the subject, that economists would by now have already developed a solid grip on how bubbles form and how to measure and compare them. No way! Despite the thousands of articles in the professional literature and the millions of times that the word “bubble” has been used in the business press, there still does not appear to be a cohesive theory or persuasive empirical approach with which to study bubble and crash conditions.

This book, adapted from my recent Ph.D. dissertation at the University of London, presents what is meant to be a plausible and accessible descriptive theory and empirical approach to the analysis of such financial market conditions. It surely will not be the last word on the subject of bubble characteristics and theory, but it is offered as an early step forward in a new direction.

Development in this new direction, however, requires an approach that appreciates the thinking behind the standard efficient market, random walk, and Capital Asset Pricing Models, but that also recognizes the total uselessness of these concepts when describing the extreme behavior seen in the events that are loosely referred to as bubbles or crashes.