The Psychology Behind Market Bubbles
Nimay Piparia, Walter Payton College Prep High School, Junior, Spring 2026
Human emotion and raw data are crucial to understanding the markets in this day and age as young investors are growing rapidly. After the infamous dot-com crash in 2000, the AI boom was driven by the same psychological factors: overconfidence, herd mentality, and narrative investing. All these factors increase the price of assets in this sector past the expected values, which are justified by the fundamentals of the market.
Bryan Williams, a microeconomics teacher at Walter Payton College Preparatory, states that “understanding behavioral economics is key to realizing that investors are not always rational with decision-making because of fear and greed.” This is contradictory to the textbook models that are widely accepted, signifying the importance of the psychological factors that affect investments.
For example, the dot-com bubble is a clear indicator of the effect of these forces. “From 1996 to 2000, annual real growth rates in private consumption and investment averaged 4.6% and 7.8%, respectively. Export growth was also very robust” (Wattret, 2025). This reflects the optimism that created an overvaluation in the market beyond sustainable levels. Investors made narrative-driven investments, ignoring real analysis, into high-tech companies with no valid foundation.
This overvaluation is measured by the Shiller P/E ratio, which divides the current stock price by the past 10 years of earnings to determine long-term behavior. At extreme Shiller P/E values, it can measure the quantity of overvaluation of a certain stock in the market, just like it did with the dot-com crash, by filtering out short-term peaks. “Bubbles obviously are never very easy to identify, but we can see there are a few potential symptoms [including] the fact that tech stocks now comprise about 40% of the S&P 500, market valuations that appear ‘stretched’ beyond their worth” (Chan and O’Brien, 2025).
From the perspective of Ansh Malhotra, a high school student at Walter Payton College Preparatory, “When my friends and people on my feed are following a trend of investments, it’s hard to recognize a bubble amidst the hype and [fundamentals].” For young investors, understanding the cycle of market bubbles and realizing when the narrative has more of an effect than the quantitative analysis has on asset prices is what separates sentiment-driven investors from informed investors.
Ansh Malhotra, Student at Walter Payton College Preparatory
Bryan Williams, Microeconomics Teacher at Walter Payton College Preparatory
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