Economic Themes (2009) 47 (2) 15, 215 -227


Sanja Vučković

Abstract: Notwithstanding great number of stock market crashes, reasons for emergence and bursting of speculative bubbles are not known with certainty. There are several explanations, both rational and irrational. Rational emergence of high prices occurs under optimistic expactations considering future corporate performance. Nevertheless, it seems that irrational behaviour and psychology of investors are constituent elements of every market cycle. In that sense, it is needed to analyze herd effect, information cascades, various heuristics and preferences in investor’s behaviour. Government policy, oriented towards financial system stability, has to acknowledge various factors important for stock market prices and speculative bubbles.

Keywords:  Speculative bubble; psychology of investors; herding; information cascades; heuristics; irrational exuberance

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