Understanding the bubbles: Vilfredo Pareto and beyond

Understanding how and why bubbles occur as well as whether these could be anticipated, managed, or even prevented is equally important as to know how to recover from them. To address these questions, a model of bubble emergence is put forward. The model builds on two fundamental commonalities that are identified to exist between the Internet and housing market bubbles: uncertainty and sentiments. The iteration between uncertainty and sentiments leads to the emergence of the third commonality: residue. The residue is the difference between the actors’ overall sentiment about exaggerated future prospects of a new venture and intended outcomes of that new venture; the higher the residue, the higher the likelihood of the bubble emergence; as residue increases, the likelihood of bubble burst increases. One question that arises is whether one can manage the hype, hence the residue. In this, it is maintained all boils down to the role pricing plays vis-à-vis the emergence of a new venture and its perceived value. Being in the midst of the global economic crisis provides us with a unique opportunity to refine the proposed model, especially by understanding its temporal and contextual boundaries