Are we in an AI bubble? Economists share the clues to look for

"If you want to stir up some frothy drama, ask an economist about bubbles. (SOUNDBITE OF ARCHIVED NPR CONTENT) EUGENE FAMA: The word bubble drives me nuts, frankly. GUO: That's Nobel Prize winner Eugene Fama talking to us on the Planet Money podcast back in 2013, when he issued a famous challenge to his fellow economists. Try and predict the next financial bubble. Robin Greenwood has been working on that challenge for years."

"Robin is a professor at Harvard Business School. He says a bubble is essentially when the market gets carried away, gets over excited about something. But a lot of times, the market gets excited for good reason. That's what he and his colleagues discovered when they went digging into the history of the U.S. stock market. GREENWOOD: So we wanted to look at every situation that was maybe a bubble and to say, what happens next? So what happens over the next 24 months?"

"They found that about half the time, what seemed like a bubble wasn't. For instance, in the late '70s, the price of health care stocks more than doubled in the span of two years. But that wasn't a bubble. Instead of popping, those stocks just kept going up and up. The same story goes for aircraft stocks in the '50s and entertainment stocks in the '60s."

Historical U.S. stock market episodes were examined to determine whether rapid price increases represented bubbles. About half of episodes that looked like bubbles continued rising rather than collapsing. Examples include late-1970s health care stocks, 1950s aircraft stocks, and 1960s entertainment stocks. Researchers identified statistical warning signs associated with past bubble collapses, with overvaluation near peaks a primary indicator. Rapid, concentrated price run-ups and other measurable markers often precede busts, though similar patterns sometimes indicate sustained growth driven by genuine economic developments.

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