Jeff Guo

Yeah, this is one of the big challenges in economics.

How do you detect a bubble before it's too late?

And this challenge is so humongous that one of the most famous economists in the world is skeptical about whether bubbles even exist.

His name is Eugene Fama.

He's kind of a big deal.

He won a Nobel Prize for his theory that markets are mostly efficient.

Fama was like, sure, it's easy to call something a quote-unquote bubble after the thing has already popped.

Hindsight's 20-20.

But if you really think bubbles are real, you should be able to call a bubble before it pops.

So it's possible there's a connection between this Planet Money episode and this paper you wrote.

They started by digging through history, looking for everything that seemed suspiciously bubbly in the U.S.

stock market.

They looked at almost a century's worth of data and found all the times where stock prices in a particular industry suddenly doubled or more within two years.

For instance, there was this big run-up in electricity company stocks in the 1920s.

There was also a big run-up in healthcare stocks in the 70s.

They found 40 examples like this.

And about half the time, there was no crash.

Investors were wildly optimistic, sure, but they turned out to be correct about their optimism.

Those high stock prices, they just kept going up and up and up.

But the other half of the time, those stock prices ended up crashing dramatically within a couple of years.