Every bubble comes with a story. Railways would knit nations together and transform trade. Radio would reach every home. Japan’s management methods would conquer world markets. The internet would change everything. Housing would always rise because population was growing and land was limited.
What makes these stories dangerous is not that they are false. Most of them are largely true. Railways did transform the nineteenth-century economy. The internet did change how people live and work. The problem is that a true story about the future can be used to justify almost any price today, and during a bubble it is.
The phrase “this time is different” has become shorthand for this pattern: the belief that the old rules of valuation no longer apply because something fundamental has changed. This article looks at why new-era stories arise, how they are stretched, what history shows about the gap between transformative change and investment returns, and how to test a new-era claim, whether you are an investor, a founder or a business owner deciding how to respond to a new technology. It is part of GoCore’s series on bubbles.
The new element in every bubble
A typical characteristic of a bubble is a new development or change in the economy that can reasonably justify higher prices. Some examples:
| Era | The new element | The story |
|---|---|---|
| 1840s Britain | Railways | Transport will be transformed, and railway companies will earn great profits |
| 1920s United States | Electricity, cars, radio, mass production | A new era of permanent prosperity |
| 1980s Japan | Japanese management and manufacturing methods | Japan’s economic model will dominate the world |
| 1990s globally | Computers, networking, the internet | A “new economy” with faster productivity growth and no more recessions |
| 2000s in several countries | Low interest rates, financial innovation, population growth | House prices can only rise |
In the 1990s, the story was supported by real evidence: an apparent sharp acceleration in US productivity growth, linked to computing and networking technology, led to widespread talk of a “new economy”. In 1980s Japan, the perception that methods such as just-in-time inventory management, worker involvement and total quality control would dominate the world was grounded in Japan’s genuine manufacturing success. Housing booms in countries such as the United Kingdom and Australia in the early 2000s were often linked to increased immigration and population growth, which were real.
In each case the new element was genuine. The question was whether prices had moved far beyond what it could justify.
How a true story becomes a bubble story
New-era stories tend to evolve in a predictable way.
Stage one: a reasonable observation. Something has genuinely changed. A new technology has emerged, an economy is outperforming, or demand is rising for a clear reason.
Stage two: a reasonable adjustment. Prices rise to reflect the change. Analysts argue, correctly, that the old valuations are too low given the new circumstances.
Stage three: extrapolation. The change is assumed to continue at its recent pace indefinitely. Early growth rates are projected forward for decades.
Stage four: dismissal of limits. Valuation measures are declared obsolete. Competition, saturation and the business cycle are said to no longer apply. People who raise these concerns are told they “don’t understand” the new era.
Stage five: the story justifies any price. At this point, the story is no longer a reason for a particular valuation; it has become a reason to ignore valuation altogether.
The shift from stage two to stage five is gradual, which is why it is so hard to notice from the inside.
Why capable people believe the story
New-era stories are not believed only by the naive. Experienced investors, respected economists, business leaders and policymakers have all endorsed them at various times. There are good reasons.
The evidence for the story is visible every day: the new technology really is spreading, the economy really is strong, the population really is growing. Those who argued against the story earlier have been proved wrong, at least for now, by rising prices. And the story is intellectually satisfying, because it explains recent experience neatly.
There is also social pressure. In a booming market, scepticism can look like a failure to understand something important. Professionals who express doubt may lose clients, influence or promotion while the boom continues. Over time, the voices that remain prominent are those that support the story, which makes it seem even more widely accepted.
None of this makes the story false. It simply means that broad agreement among capable people is not, on its own, evidence that prices are reasonable.
Transformative change, disappointing returns
One of history’s most consistent lessons is that a technology can transform the world while still delivering poor returns to many of the investors who financed it.
There are several reasons.
Competition. When everyone recognises an opportunity, many companies pursue it. Competition drives prices down and spreads profits thinly. Much of the value created flows to customers in the form of lower prices and better products, rather than to the companies’ owners.
Overinvestment. Booms encourage far more capacity than the market can profitably use. Thousands of miles of railway, or vast fibre-optic networks laid in the late 1990s, were eventually used, but often only after their original investors had lost heavily.
The winners are hard to pick. In a new industry, it is very difficult to know which companies will dominate. Many early leaders fail. Investors who buy across the whole industry at bubble prices hold many losers.
Prices already reflect the future. If share prices already assume decades of rapid growth, even good outcomes can produce disappointing returns.
The economist Carlota Perez has described a recurring pattern in major technological revolutions: an early “installation” period, often marked by financial speculation and a bubble, followed by a crash and then a longer “deployment” period in which the technology spreads through the economy and delivers its broad benefits. The bubble, in this view, helps finance the infrastructure, but the investors who fund it are not always the ones who benefit.
The hype cycle
A related idea, widely used in the technology industry, is the hype cycle popularised by the research firm Gartner. It describes how expectations for a new technology tend to rise to a peak of inflated expectations, fall into a trough of disillusionment when early promises are not met, then gradually recover as practical uses become clear and the technology settles into productive, unglamorous use.
The hype cycle is a description of expectations rather than of prices, and not every technology follows it. But it captures something important: initial excitement tends to overshoot, disappointment tends to overshoot in the other direction, and the real long-term value usually emerges more slowly than the enthusiasts expect and more substantially than the sceptics expect.
New eras today
Every generation has its candidates for a new era. At the time of writing, artificial intelligence attracts enormous investment, media attention and ambitious forecasts. Other areas, from energy technologies to biotechnology, have their own new-era stories.
Nothing in this article is a prediction about whether any particular current enthusiasm is a bubble. That would require detailed analysis of valuations, credit and the other warning signs, and even then the timing would be uncertain. The point is narrower: the presence of a genuinely transformative technology does not, by itself, tell you whether the prices being paid for it are sensible. History suggests treating “this changes everything” as a hypothesis to test, not a conclusion.
How to test a new-era claim
When someone argues that a market, industry or technology has entered a new era, a few questions help separate a reasonable adjustment from a bubble story.
What exactly has changed? A specific, measurable change, such as a fall in costs, a rise in productivity or a new source of demand, is more credible than a general sense that everything is different.
How large is the change, and how long will it last? A real change may justify somewhat higher prices. It rarely justifies prices that assume the change will compound at its fastest rate forever.
Who will capture the value? Even if the change creates enormous value, it may flow mainly to customers, or to a few dominant companies, rather than to everyone investing in the field.
What would competition do? If high profits are expected, how many competitors will enter, and what will that do to prices and margins?
What would have to be true for current prices to make sense? Working backwards from today’s price to the earnings, growth or adoption it implies often reveals assumptions that are hard to believe.
Are old measures being dismissed, or adjusted? Thoughtful analysis explains why a measure should change by a particular amount. Bubble reasoning simply declares it irrelevant.
What this means for founders and business owners
New-era stories affect businesses in several ways beyond share prices.
Deciding whether to adopt a new technology
Businesses face pressure to adopt each new technology quickly, for fear of being left behind. Sometimes that pressure is justified. Often, the most valuable approach is to identify specific, practical problems the technology can solve now, test them on a small scale, and expand where the results are clear.
A useful discipline is to describe the problem first and the technology second. If a business cannot name the specific task, cost or risk that a new tool will improve, it is buying a story rather than a solution. GoCore’s article What makes a useful product worth building? applies the same thinking to new products.
Building a business in a hot area
Founders building in a fashionable field benefit from attention and easier access to capital. They also face intense competition, inflated costs for talent and inputs, and customers who may be experimenting rather than committing.
Some principles help:
- Build on durable needs, not on the excitement itself. If the enthusiasm faded tomorrow, would customers still need what you offer?
- Keep costs proportionate. Boom-time funding can encourage spending that only works if the boom continues.
- Measure real usage and payment. Interest and trials are not the same as customers who pay and stay.
- Prepare for the trough. If the field follows the hype cycle, a period of disillusionment will come. Businesses with real customers and modest costs survive it.
Avoiding new-era thinking in your own plans
Business plans can contain their own new-era stories: a market that will grow 50% a year for a decade, a product that will face no serious competition, costs that will fall indefinitely. Testing these assumptions with the same questions used for markets can prevent expensive mistakes.
A worked illustration
This is an illustration, not a real company.
A small engineering firm is excited by a new automation technology that competitors are adopting. A supplier presents a proposal for a large system, with forecasts of dramatic savings.
The owner applies the new-era questions. What exactly will change? The supplier’s forecasts assume full use of the system across every process. What would have to be true? Labour savings would need to be three times what similar firms report. Who captures the value? Much of it may go to the supplier, whose prices reflect the current enthusiasm.
The firm instead identifies one repetitive process where the technology clearly helps, pilots a smaller system, and measures the results over six months. The savings are real but smaller than the forecast. The firm expands gradually, process by process, paying lower prices as competition between suppliers grows. It gains most of the benefit at a fraction of the original cost and risk.
Common mistakes
Dismissing the story entirely. New-era stories are usually partly true.
Accepting the story as a reason to ignore price. A true story does not justify any price.
Extrapolating early growth forever. Growth slows as markets mature and competition arrives.
Assuming investors capture the value. Customers and a few winners often capture most of it.
Buying a technology because it is new. Start with the problem it solves.
Questions to ask
- What specifically has changed, and how large and lasting is the change?
- What would have to be true for current prices to make sense?
- Who will capture the value created: customers, a few leaders, or every participant?
- Are valuation measures being thoughtfully adjusted, or simply dismissed?
- For your own business: what specific problem would this new technology solve, and how will you measure it?
Bringing it together
Every bubble rests on a story about a new era, and most of those stories contain a large element of truth. Railways, electricity and the internet did transform economies. Population growth and lower interest rates did support higher house prices. The danger lies in stretching a true story until it justifies any price, dismissing valuation, competition and the business cycle along the way.
Testing new-era claims means asking what has specifically changed, how far it can justify higher prices, and who will actually capture the value. For founders and business owners, the same discipline helps in adopting new technologies and building in fashionable fields: start from real problems, keep costs proportionate, and be ready for the period when the excitement fades.
Sources: an introductory chapter on asset bubbles written in the mid-2000s, the work of Carlota Perez on technological revolutions, and widely documented economic history. The worked illustration is hypothetical. This article is general information, not financial or investment advice.
