With all of the talk in the financial media about a housing bubble, or a credit bubble — and we all remember the tech bubble — I have been wondering if there was an airplane bubble? I suppose there is a specific definition of a financial bubble somewhere in academia, but I would define a bubble as behavior that lasts long enough that a majority begin to accept it as a new reality, when a rational analysis would show that things are too good to be true. For example, we all knew that house prices couldn’t go up at double-digit rates and greater indefinitely. But house prices became part of a bubble because they did go up at unsustainable rates long enough that many came to accept this as normal.
To me, the key ingredient in any bubble is duration. If speculators lose money quickly, the bubble never forms and the ordinary person stays on the sidelines. But if prices seem to defy gravity for several years, even the cautious feel obligated to join in or get left behind. And that’s when the end comes.
