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Week 6 (20.04-26.04) Price balloons

An economic price bubble is a concept presenting a situation in which goods of certain type appreciate steadily until a spectacular sudden drop called a crash or a bubble bursts. Two examples of such a phenomenon occurred during our lives: a real estate bubble burst in 2008(great time for investment 1$=1.92PLN) and a dot-com bubble in 2000. In my opinion the latter one was much more interesting as it turned upside down the e-market by tearing up some of the biggest players on the market and formed the internet business as we know it today. It was inevitable and it’s probably good that it happened before we got into the business.

There are several theories why the price bubbles happen. My favourite is “Greater fool theory” which lies upon an idea that goods are purchased by over optimistic fools who assume that they will find even more optimistic fools and make profit. There are a few more quite simple phenomena: extrapolation (projecting historical data into the future by following current tendencies) and herding (when brokers make decisions based on decisions of their peers).  These rules combined make me surprised that there were only so few price bubbles in the past.

The main problem with the bubbles is that they are usually identified only in retrospect after the boom. I noticed quite suspicious growth of prices in the classic car market, especially Porsche classic models. In the last ten years prices of the Porsche cars increased their value like no others. The stereotype of sports car the 911 Carrera RS (1971-1973) increased its value by 669%(record). An interesting fact is that Porsche never planned to sell these cars back in the 70s. They were produced to meet racing homologation requirements and suppose to rust in the factory parking lot as they thought nobody would like to buy them. The 993 Turbos from the mid-90s cost more than the current equivalent from the factory. This applies even to the most common and cheapest models produced before 1990.




Porsche 911 Carrera RS



Comments

Unknown said…
This comment has been removed by the author.
Unknown said…
Wow, I think that's the first time that I really don't have anything in mind that I could say on the subject matter. Nice article though, shame you didn't ask any questions below.
I wanted to. As you will notice now none of new articles have questions at the bottom.
Unknown said…
Yea, I noticed that, but it's still ashame. Questions were very useful.
IzabelaSzumen said…
I don't know what can I say.. this topic is clearly from some mysterious universe with whom I have nothing in common :) .
But I'm newborn fan of “Greater fool theory”.
IzabelaSzumen said…
This comment has been removed by the author.
Unknown said…
Price balloons for some may be a disaster and for some a big opportunity. Not sure if you know that, but with BitCoin happened something similar. It looks like the most popular BitCoin market exchange MtGox got hacked, from which hundrets of thousands of BitCoins were stolen and their price got manipulated. Many months back are being investigated and analysed. Researchers have found that there were bots who were opening accounts and making transactions in regular intervals. Each account was used to make a transaction only once in it's lifetime. What's even more interesting is that the fact that those bots were doing transactions which earned millions, without making mistakes.
The most funny thing about prices is the fact that them are usually composed of costs covering the goods needed to create a thing and of abstract value (e.g. worth because of heritage of an item, history of an item, past possession of an item by certain people etc.). That second reason of establishing a price is in some cases much more important which might in some cases cause a price balloon mentioned in the topic.
I'm such a hopeless layperson when it comes to economy that I don't think I have anything valuable to say on that subject - its the first time I've heard that term and I don't remember the two events you've mentioned :) I agree with Izabela - the world of economy seems to be some other, mysterious universe :)

However, it's always good to learn about something new :)
Anonymous said…
Heritage is one of the most valued qualities in the world. Steve McQueen's cars are worth from few millions $ each, Ferraris from 60's are sold for > 30mln$. Many luxurious brands refer to their history. It's languishing trend as usually those brands have nothing interesting to offer anymore.
Anonymous said…
Originally I wanted to ask: Have you noticed any suspicious trends which would indicate possible price bubble: modern art, television, real estate, education( for instance our school fees are ridiculous).
Unknown said…
Yeah, I have nothing to say as well :( That's a pity that there are no additional questions :P
Unknown said…
I feel a little strange about this topic and I’m not sure if I understand this or it is just not my story. It is the first time when I read about something like that and I’m not sure what to say. It is a strange article for me.
Unknown said…
think that economic bubble can concern every field connected with trade and investment. The best example for it is “Tulip mania”, known as the oldest stock market bubble. It was especially popular in Netherlands where tulips were becoming a luxury commodity. Tulips were sold on the Dutch stock exchange. They seemed to be a very good investment with a fast income. The tulip’s bulbs prices were very expensive as a result of a high demand. In 1637, there was a market crash because of exorbitant tulip’s seedlings prices. Most of the investors went bankrupt, left only with worthless plants.
Unknown said…
Real estate price balloons are the most visible examples. There are many deserted cities in China because prices of apartments have risen tens of time in past 10 years. Now there is also the same problem in New Zealand. In Auckland real estate prices are exorbitant. Small flat costs at time almost million NZD.
Unknown said…
Well, I'm not sure I understand the subject of this article. It seems to be completely out of my area of interest so I can't really tell anything meaningful. But I'll try to mend that and maybe read something about it.
Price ballons are common phenomenon most of bigger companies are trying to use it to their own advantage. Even I was using this to gain money when I was playing some MMO games with auction house. It was really fast way to gain a lot of money in quick time and the method was really simple. I was just buying every item below certain price for example below 1500g and then I was selling it for 1500-2000g by doing it I had monopolized some items on the auction house and thanks to that I was able to increase prices of those items from around 50-100g to around 1500-2000g and I was gaining a lot of money only by using that simple trick. Corporation currently are doing exactly the same trick like I was doing but only in far more bigger scale and they are not earning just virtual money like I was but really big real money.
Unknown said…
What’s the topic? Economy is not my story, no no no. I’m not sure that I understand this phenomenon. In this situation like never before I need a question :P I don’t know what can I say.
Unknown said…
Did you heard a story about a man who build a big save? Once upon a time in small but wealthy city, lived a man who build big save for all his gold. After a while other merchants also came to think that having save place to store their money is an good idea. So they came to the man and ask him to store their money in his save. He agreed and after that every time when someone wanted to withdraw some gold he would come to the man. The man did not like to open his save every time someone came, so he came up with idea that he will give people piece of paper represent a promise of gold to be withdraw from his save.
And this my dear is concept of money as we known it today. A promise.
Unknown said…
Well, I understood economic approach and at the same time I must tell you that it is interesting. The same concept could be seen also in the International Relations area and its called - Black Swan Effect. It is the event that changes the whole international situation, development of the society and it obviously influences economy, technology and other branches. From the logical point of view, Black Swan is impossible to predict, however, it could seem obvious and easy-predictable after that happened. For example such situation happened when people came up with internet, PC. When Hitler started WWII no one was able to predict that Germany will start one of the most bloodiest conflicts in the modern world history, however, when it ended everyone thought that it was obvious due to the historical, demographic and economic reasons. Obviously, the event that could be predicted easily or affect on the area/state/region could not be called as Black Swan [for that purpose was made also a Grey Swan or Grey Knight Effect]. Actually Black Swan effect could seem illogical system, but it mainly operates on the econometric principle and its formulas. So it is interesting topic and it depends on the side from which it must could be reviewed.
I know one situation from last months. I don’t know if this is a price bubble. Exchange rate of UAH – Ukrainian money is very attractive. In first month of this year the price for 1 UAH was about 0,25 zlotys. 25th of July 1 UAH cost 0,1 zlotys. At the end of April I think that price is still attractive – 0,16 zlotys. This hesitation of course are caused by bad situation in this country. I think that Ukraine is very cool country for holiday now, you have cheap hotel, food, drink. Personally I want to go to Kiev for a weekend.
Anonymous said…
Good comment, I didn't know about this phenomenon. It is common that people rationalize hardly predictible past events by fitting facts togheter.
Michal Kulesza said…
Wow, Amazing explanation - I've never heard about Black Swan Effect, it's really interesting
Michal Kulesza said…
Don't you think that startups are the new dot-com balloon? Usually these are overpriced - Like snapchat or the 'yo app'. It's nothing interesting from commercial point of view.

I've heard already the story of Porsche (maybe in some TopGear's ([*]) episode?). Also I've heard that if you will drive Porsche once you will not want to drive another care.

Sometimes it's not price bubble (I'm reffering to last sentence, in which you hope that car business is price bubble) but you pay for the logo of the make, for the know how, for future R&D, for patents etc.

However (still going a bit off topic) it may change - car companies wan't to prohibit home-made repairs (and even all of the repairs not made by official workshops).
Anonymous said…
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Anonymous said…
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Anonymous said…
I don't think startups per se are price bubble as there are usually no money involved at the beginning. Maybe crowd fundraising is, but I think it will stabilize in next few years.
Mateusz Frycie said…
Frankly speaking this topic is completely new to me. No idea what to say about it:/
Unknown said…
This comment has been removed by the author.
Julia Osiak said…
It's a shame that this article is so short, as I would like to have a little bit more explanation of this subject. I have heard the phrase before, but I still don't fully understand it. I also heard about the dot-com phenomenon, yet there still is nothing that I could add to this discussion concerning this subject.
MartaSB said…
It's a very interesting topic as these events affect countries, companies and normal citizens in totally different way. Let's hope we will always be on the side that is better off.
Nice article. I think that price bubbles might be caused by the fact that most of people tend to follow the majority or the "experts" blindly. Sometimes economic "experts" say lies or half-truths in order to make some money for themselves or just to shine in the television. Similar thing happened with loans taken in swiss francs in Poland. It was not a price bubble, but I think it is a similar thing in some way. Many people did something (took a loan in swiss francs) which appeared to be profitable because of advices from the "experts" but much later they lost a lot of money because of that.
rf. said…
Are they? :)
Unknown said…
It's hard for me to say anything more about this topic, because I don’t have economic skills. But this article it's quite interesting., especially the part about Porsche.
rf. said…
I think it might be hard to pinpoint possible future bubbles because of the differences in currencies and inflation, but maybe something obvious like... food?
Anonymous said…
It ate my comment. "If I knew about that I would buy a lot of UAH. I was waiting for a long time for such an event but it seems I haven't been paying enough attention."
Unknown said…
Bubbles happen. It is most unfortunate that you can't predict them as it would be great way for some speculative business... but on the other side would they be bubbles then?
As you just glanced over the dot-com bubble I thought I'd share this link with you:

http://agreiter.com/blog/?p=166

It goes in depth on why it happened, what were the circumstances and mindsets of business people around that time and eventually what were the consequences.
On a side note, there might be another big bubble burst pretty soon concerning the Chinese technology market.
Here you can find more about it:

http://www.bloomberg.com/news/articles/2015-04-07/u-s-dot-com-bubble-was-nothing-compared-to-today-s-china-prices
Unknown said…
Really, I don't know what you are talking about :(. But I will try to share my mind. I don't know if price balloons could be predictable. The first thought is no, but maybe the smatrtest know that. It seems to be such complex process. Seems like our students aren't interested in economy and I am not the olny one ;). But to give some opinion - I always thought Porsche cars are good investment.
Unknown said…
Really, I don't know what you are talking about :(. But I will try to share my mind. I don't know if price balloons could be predictable. The first thought is no, but maybe the smatrtest know that. It seems to be such complex process. Seems like our students aren't interested in economy and I am not the olny one ;). But to give some opinion - I always thought Porsche cars are good investment.

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