Bubbles and Crashes
Book Author: Brent Goldfarb and David A. Kirsch
Bubbles and Crashes by Brent Goldfarb and David A. Kirsch provides a fresh perspective on the complex dynamics connecting technological change, investment manias, and financial crises. While history is filled with transformative technologies, not all of them led to speculative frenzies. Goldfarb and Kirsch investigate this discrepancy to answer a critical question: beyond the technology itself, what are the underlying causes of market bubbles and crashes?
At the core of the book is a framework. The authors present four key factors that they believe are important to review: the level of uncertainty around an innovation, the presence of “pure-play” companies directly connected to the technology, the way narratives interact with belief structures, and the presence of novice investors.
This framework is brought to life through the use of examples. They begin by studying fifty-eight different technological innovations to create their methodology. This explanatory model is then evaluated and tested on thirty more recent technologies.
The examples include many lesser known stories, such as a comparison between the commercialization of Brush electric arc lighting in Cleveland and London. In this figurative and literal illumination of the framework, the underlying technology is the same, and yet only London added speculative fire on top. The authors argue the bust slowed adoption, leaving London’s streets darker for longer.
Because the line between market cycles and bubbles is thin, the authors spend time defining bubbles, and also limit their focus specifically to technology. A core aspect of the framework is how uncertainty, pure-play investments, narratives, and novice investors interact to amplify the bubble, leading to the eventual crash. The late 1920s was not only a time of technological change, it was an era when all these factors created a positive feedback loop that turned optimism into mania.
Importantly, there are also cases of transformative technological breakthroughs where the absence of one or more factors results in no market bubble. For example, phototype printing transformed the original printing process, with the potential for increased speculation. While the technology was related to the media value chain, ultimately it did not capture the public imagination as an investment narrative and was instead perceived as a utilitarian process improvement. The authors conclude that the story never became investable.
In addition to studying bubbles and crashes, the authors provide ideas for policy implications. Interestingly, they mention that the role of leverage has been extensively covered when it comes to market speculation, and so they focus on other less discussed topics. This is not meant to discount the importance of leverage, just that the authors believe there is already enough discussion of the topic.
One of the key areas the authors emphasize is education for investors and entrepreneurs. It’s an admirable goal, though one might question the practical impact this would have on the emotions that fuel excess speculation in our current age of extreme clickbait content.
Overall, the book is strongest in its research of understanding which factors are key to creating bubbles and crashes. The authors’ methodical approach to create a structured framework applied to a variety of examples is both insightful and practical.
Why I Recommend This Book
Anyone interested in the future of technology and markets should read Bubbles and Crashes to understand the historical context. Instead of focusing on the drama, the authors take a measured approach, skillfully identifying underlying causes.
For both investors and entrepreneurs, the book provides a helpful framework to navigate the ups and downs of technology and market cycles. For policymakers, it brings up important questions about how to support innovation while maintaining financial system stability.
As technology continues to accelerate, these questions will only become more important. Instead of relying on formulaic dogma or tired stereotypes about markets, an important first step is understanding the lessons of history, as shared in this book.
