Displacement · Boom · Mania · Distress · Crash · Minsky
Markets don't always price assets rationally. When sentiment and leverage combine with a compelling narrative, prices detach from fundamentals — sometimes for years — before crashing back to reality.
The Minsky-Kindleberger model describes bubbles in five stages: Displacement (a genuine innovation or policy shift attracts initial investors), Boom (prices rise, attracting momentum traders who push prices higher), Euphoria/Mania (widespread public participation, leverage peaks, "this time is different" narratives), Distress (smart money exits, credit tightens, first signs of trouble), and Crash/Revulsion (forced selling, panic, prices overshoot below fundamental value). The key feedback is procyclicality: rising prices allow more borrowing (collateral increases), which drives prices higher, until leverage makes the system fragile and a small negative shock triggers cascading forced deleveraging.
Click "Trigger Event" to launch the bubble. Watch sentiment (the inner loop) drive price above fundamental value. Increase the Leverage Multiplier to make the bubble larger and the crash sharper. Increase Momentum Factor to extend the mania phase. Increase Mean Reversion to make prices snap back to fundamentals faster (shorter mania). Click "Crash Trigger" at peak mania to simulate a Minsky Moment — the sudden recognition that valuations are unsustainable. The participant gauge at the bottom shows the shifting composition of market actors across phases.
The Dutch Tulip Mania (1636–37) saw tulip bulbs briefly trading for 10× the annual income of a skilled craftsman. The 2000 dot-com bubble saw the Nasdaq rise 400% in 5 years then fall 78%. Economist Hyman Minsky (1919–1996) was largely ignored during his lifetime — his theory of financial instability only became mainstream after the 2008 financial crisis that his work predicted. Charles Kindleberger's 1978 book Manias, Panics and Crashes catalogued 47 major financial crises over 400 years, finding the same pattern repeated every time.
This simulation models a speculative asset bubble using the Minsky-Kindleberger framework. The asset price P(t) is driven by a coupled set of differential equations integrated with a small time step (DT = 0.005 years). Price change depends on sentiment, momentum and mean reversion toward a fundamental value V(t) = V0 e^(gt), all amplified by leverage. Sentiment evolves from a cubic "reality check" term, while a participant mix of smart money, momentum traders and panic sellers shifts across phases.
The sliders set the model's behaviour: fundamental growth g, sentiment sensitivity alpha, momentum factor beta, mean reversion gamma and a leverage multiplier that compounds gains once price exceeds 1.5x fundamental value. "Trigger Event" injects a positive sentiment shock to start a boom, while "Crash Trigger" simulates a Minsky Moment. Bubbles matter because procyclical leverage turns rising collateral into fragility, so a small shock can cascade into forced selling, as seen in 1929, 2000 and 2008.
What is a financial bubble?
A bubble is a period when an asset's market price rises far above its fundamental value, driven by sentiment, leverage and a compelling narrative rather than by earnings or utility. The detachment can persist for years before prices crash back, often overshooting below fair value. This page lets you grow and pop one in real time.
What model does this simulation use?
It uses the Minsky-Kindleberger framework, which describes five stages: Displacement, Boom, Euphoria/Mania, Distress and Crash/Revulsion. The simulation adds Recovery as a final phase. Phases are detected automatically from the price-to-value ratio and momentum, so the coloured background regions on the chart show which stage the market is currently in.
How does the price actually change each step?
Each step the price changes by (alpha x sentiment + beta x momentum + gamma x (V - P)/V) multiplied by a leverage effect, plus a little random noise. Sentiment itself evolves from momentum minus a cubic penalty for overvaluation minus natural decay. The fundamental value grows deterministically as V0 e^(gt), giving the dashed reference line.
Fundamental growth g (0-10%) sets how fast V rises. Sentiment sensitivity alpha (0.5-5.0) scales how strongly mood moves price. Momentum factor beta (0-2) extends manias by chasing trends. Mean reversion gamma (0-2) pulls price back toward V faster, shortening bubbles. The leverage multiplier (1x-10x) makes booms bigger and crashes sharper.
Leverage amplifies every price move. Once price exceeds 1.5x the fundamental value, the leverage effect compounds as leverage x (P/V - 1), so gains feed on themselves; below that threshold it is dampened to leverage x 0.3. Higher leverage produces a taller bubble and a more violent crash, mirroring how rising collateral lets investors borrow more until the system becomes fragile.
It simulates a "Minsky Moment": the sudden collective recognition that valuations are unsustainable. Clicking it applies a sharp negative sentiment shock (around -2 to -3) and an immediate price drop of roughly 8-12%, and forces the model into the Distress phase if it was booming. From there momentum and forced selling can cascade into a full Crash and Revulsion.
The gauge displays the shifting mix of three actor types: smart money (green), momentum traders (amber) and panic sellers (red). Their fractions drift toward phase-specific targets each step. In Mania momentum traders dominate, smart money quietly exits, and in a Crash panic sellers surge to around 72%, illustrating how the crowd composition changes through the cycle.
It is a stylised teaching model, not a forecasting tool. The qualitative behaviour, such as procyclical leverage, sentiment feedback and overshooting on the downside, reflects genuine features of historical bubbles. The exact equations, coefficients and noise are chosen for illustrative clarity, so the numbers should be read as a conceptual demonstration rather than calibrated predictions.
During Revulsion, forced deleveraging and panic selling push price below V, just as the boom pushed it above. In the model the cubic reality-check term and negative momentum drive price down past parity before mean reversion and recovering sentiment slow the fall. This mirrors real markets, where fire-sale dynamics and fear create temporary undervaluation.
Hyman Minsky (1919-1996) was an economist whose financial instability hypothesis argued that stability itself breeds risk-taking and leverage. Charles Kindleberger wrote the 1978 classic Manias, Panics and Crashes, cataloguing centuries of bubbles that followed the same arc. Both were largely overlooked until the 2008 crisis made their ideas mainstream.
The Historical Echoes panel sketches three: the 1929 Great Crash, the 2000 dot-com bust where the Nasdaq rose around 400% then fell about 78%, and the 2008 housing collapse. Earlier, the Dutch Tulip Mania of 1636-37 saw bulbs trade for many times a craftsman's annual income. All share the displacement, mania and crash pattern the simulation reproduces.