When Everyone Believes: Why Bubbles Persist Even as They Burst

How analysts fail to recognize bubbles in real time

Financial bubbles often look obvious in hindsight. We shake our heads at charts of Yahoo! in 1999 or GameStop in 2021 and wonder how anyone could have believed those prices reflected reality. But a striking question sits beneath every boom and bust: what did experts actually think while the bubble was inflating? Were they skeptical? Were they conflicted? Or were they just as optimistic as everyone else?

A new data-rich study covering more than 5,000 boom-and-bust episodes between 1980 and 2023 offers an unusually systematic answer. By analyzing analyst forecasts, short-selling activity, lending fees, and media coverage at the precise moments when valuations peaked, the researchers uncover a simple but profound insight:

At the height of a bubble, nearly every visible signal points to optimism, not caution. Skeptics exist, but they are small in number, constrained in action, and nearly invisible in public discourse.

This is the story of what experts believe during bubbles and why that optimism predicts crashes surprisingly well.

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A Better Way to Study Bubbles: Look at Stocks, Not Markets

Most bubble research focuses on broad episodes like the dot-com era or housing boom. The new study takes a radically different approach: it examines individual stocks that experienced the classic bubble pattern:

• A 100%+ price run-up over the past year

• Valuations in the stratosphere (price-to-sales or price-to-book > 5)

• A crash of at least 50% within the next two years

By isolating single-stock boom-busts, the researchers gain far more statistical power and avoid the narrative traps of studying only famous episodes. The result is a dataset containing household names like GameStop and Yahoo! but also thousands of forgotten micro-bubbles that played out quietly in the background of financial history.

Across this enormous sample, one theme repeats: experts rarely recognize a bubble while they are standing in the middle of it.