Why Bubbles Are Inevitable

  • by Amando Abreu
  • on 04 November 2018

Bubble: used to refer to a good or fortunate situation that is isolated from reality or unlikely to last.

Well, I’d like to define reality while we’re at it:

Reality: the state of things as they actually exist, as opposed to an idealistic or notional idea of them.

“Things as they actually exist” change all the time, facts change, reality changes. So this gets really complicated really fast, an iPhone bubble before the discovery of semiconductors would have been a bubble because it was detached from reality, but now it’s just another phone. Crypto can be considered a bubble now but be absolutely normal in 30 years, we don’t know.

Why do bubbles happen?

People, in general, aren’t sure what to do, what choices to make, etc. 

An easy way to figure out what to do is by simply copying what others do.

  • If it feels like everyone is buying a house(looking at you, US in the 1980’s), more people will also buy a house because that’s now the right course of action.

  • If everyone is buying stock of dotcom businesses(again, US, 1990) then I also will because it’s normal.

  • If it feels like everyone goes to college like in the 2010’s, then I will also go to college because it’s what everyone does.

Meanwhile, real estate brokers in 1980’s; financial advisors in the 1990’s; and colleges in the 2010’s; and cryptocurrency’s code* will take advantage of this wave and raise their prices because it’s creating incredible profit for them. So, you see colleges inviting you in, and you see everyone going in them, why wouldn’t you also do it? You’d have to be insane not to!

*It gets more expensive the less there is by design, it’s a short lived bubble-machine(I’m not saying this always bad, don’t stop reading yet).

As soon as the prices start to increase too much, you’re buying something that is only worth that much because everyone also wants it, when the difference between the actual value and the price is way too big, this is a bubble. It’s kind of a way to hack a supply-and-demand based system, and it works.

Any time too many people do the same thing just because they feel they should do it, they are acting based on an instinct that we have deep in us, which is to go with the flow.

Ants do something similar — I’m not an ant scientist so I can’t explain why any better than you can find out for yourself— but I can show you what happens when this heuristic fails them:

companyapp

Each and every ant is following the ant in front of them, they will eventually all die of exhaustion/hunger.

Ants are simpler than us, and thus unable to think for themselves, but we can, so why don’t we?

“Bubbles end when people start thinking for themselves” — Peter Thiel

We do think for ourselves only about some things, only sometimes

No one is able to think for themselves about everything all the time, if I decide to question everything I see, hear, or feel, always, it will lead to insanity, so there will always be space for a bubble.

Using this same definition of bubble one could make an argument as to how society is kind of a bubble, just a really long-lasting one.

Take a step back and look at the things you do without really knowing why just because everyone else is doing it and it feels normal. You might just avoid the next bubble, or you might realize how nearly everything in society requires a certain level on bubble-ness to function properly.

About the author

Amando Abreu is a generalist with an affinity for technology and people. If you'd like to punch me in the face, click here. If you would like to give me some anonymous feedback, do it right here: contact;

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