Anatomy of a bubble: Five acts, always in the same order

Every bubble thinks it is unique. Yet almost all follow the same script, in five acts.

The economist Hyman Minsky described this script. The historian Charles Kindleberger found it in centuries of crises.

Act one: displacement. A real novelty changes the game. The railway, the internet, or a sharp fall in rates.

At first, those who buy are right. The novelty creates real value, and prices rise for good reasons.

Act two: the boom. Credit becomes easy, new buyers arrive, and rising prices attract more rises.

Act three: euphoria. People no longer buy to own. They buy to sell on at a higher price.

Say a flat at one hundred thousand euros, rented for four thousand euros a year. It yields four per cent.

Its price rises to four hundred thousand euros, the rent does not move. It now yields only one per cent. Only the resale matters.

At this stage, the buyer no longer looks at the rent. He looks at the neighbour who made money.

In the app, this chapter is animated and narrated, card by card. Start free trial.

And that is when you hear the phrase: this time is different. The old rules supposedly no longer apply.

In two thousand nine, the economists Carmen Reinhart and Kenneth Rogoff made it the title of a book on eight centuries of crises.

Their finding: every time, people said it was different. And almost every time, it was not.

Act four: distress. The best informed start selling, quietly.

The price stalls and hesitates. New buyers grow scarce, and it would take ever more of them to keep rising.

Act five: panic. Everyone wants out at the same time, through a door that is too narrow.

Kindleberger had a word for what follows: revulsion. Nobody wants to hear about what they once adored.

One question remains. Why does price stray so far from value? George Soros answers: reflexivity.

Usually, we think price measures value, the way a thermometer measures temperature.

For Soros, this thermometer heats the room. A rising price attracts money, credit, confidence, and changes what it measures.

A company whose share soars borrows easily and buys its rivals. Its numbers improve, for a while.

The circle also turns the other way. When the price drops, credit closes, and value drops with it.

Displacement, boom, euphoria, distress, panic. You never know which act you are in. But the signs can be recognised.

If you are buying only because it is rising, and you are told this time is different, you are probably in act three.