In 1720, Isaac Newton lost £20,000 in the South Sea Bubble—roughly £4 million in today's money. The man who deciphered gravity's laws couldn't resist the pull of speculative mania. I can calculate the motion of heavenly bodies, he reportedly said, but not the madness of people.

Three centuries later, the same patterns emerge with remarkable consistency. Tulip bulbs, railway stocks, dot-com shares, housing derivatives, cryptocurrencies—each bubble wears different clothes but follows an identical choreography. The names change; the human psychology driving them doesn't.

Understanding bubble anatomy isn't about predicting exact timing—nobody consistently does that. It's about recognizing where you stand in a cycle that has repeated across every asset class, every country, and every era. The patterns are identifiable precisely because they're rooted in unchanging features of human cognition and market structure.

Economist Hyman Minsky's framework, later refined by Jean-Paul Rodrigue, maps bubbles through five distinct phases. The stealth phase begins when smart money identifies a genuine opportunity—new technology, regulatory change, or structural shift. Prices rise modestly as informed investors accumulate positions. Most people ignore this phase entirely.

The awareness phase brings institutional money and early adopters. Media coverage increases. Prices climb more visibly, but skeptics still outnumber believers. Fundamentals often justify valuations at this stage—the opportunity is real, even if enthusiasm is growing.

Then comes the mania phase, where prices decouple from any reasonable valuation framework. Retail investors flood in, terrified of missing out. Taxi drivers and dentists become experts. New paradigm arguments emerge—this time is different becomes the mantra. Credit expands to fuel purchases. The blow-off phase follows: a final parabolic surge as the last skeptics capitulate and everyone who will ever buy has bought.

The crash phase needs no introduction. Prices collapse faster than they rose. The same leverage that amplified gains now amplifies losses. Margin calls force selling regardless of conviction. What took years to build can unwind in weeks. The cycle completes when prices fall below where the mania began—overcorrection is as certain as the bubble itself.

Takeaway

Every bubble follows the same five-act structure because it's driven by human psychology, not specific assets. Identifying which act you're watching helps distinguish opportunity from trap.

Bubbles aren't caused by stupidity—they're caused by rational individual decisions that become collectively irrational. Three feedback loops transform ordinary price appreciation into speculative mania, and understanding them reveals why bubbles accelerate so dramatically.

The leverage loop operates through borrowed money. Rising prices increase collateral values, enabling more borrowing, which funds more purchases, which raises prices further. Housing bubbles exemplify this: higher home prices meant larger loans meant more buying power meant higher prices. When this loop reverses, the destruction mirrors the construction.

The attention loop runs through media and social networks. Price gains generate headlines. Headlines attract new participants. New participants push prices higher, generating more headlines. Social media has compressed this loop dramatically—viral investing phenomena now develop in days rather than months. The attention itself becomes the story.

The newcomer loop brings progressively less-informed participants. Early investors understand what they're buying. Late-stage buyers often don't—they're buying price momentum, not the underlying asset. Each wave of newcomers has shorter time horizons and less tolerance for drawdowns. When prices falter, they panic first and hardest, triggering the cascade.

Takeaway

Bubbles accelerate because multiple feedback loops reinforce each other simultaneously. When you see leverage expanding, media attention intensifying, and inexperienced investors flooding in together, you're likely watching late-stage dynamics.

Distinguishing sustainable trends from terminal bubbles requires both quantitative and behavioral markers. No single indicator is definitive, but their convergence provides useful signal. Valuation extremes matter—not because expensive assets can't get more expensive, but because they reveal how much optimism is already priced in. Price-to-earnings ratios, price-to-sales, or asset-specific metrics stretched beyond historical ranges indicate late-stage dynamics.

Watch participation breadth. Healthy markets see gains distributed across many assets and sectors. Late-stage bubbles concentrate into fewer and fewer names as investors chase whatever still moves. When a handful of stocks drive all index gains, the foundation is narrowing.

Behavioral markers often prove most reliable. New paradigm narratives emerge to justify valuations that traditional frameworks cannot—claims that old metrics don't apply anymore. Time horizon collapse appears: investors who once talked in years now measure in weeks or days. Social pressure intensifies: not owning the hot asset becomes uncomfortable at parties and family gatherings.

Perhaps most telling: risk becomes invisible. Late-stage manias feature remarkably low perception of potential loss. Participants genuinely believe prices can only rise. This isn't greed exactly—it's the erasure of the concept that things could go wrong. When everyone you know has made money and expects to make more, danger feels theoretical. That collective certainty is itself the warning.

Takeaway

Late-stage bubbles reveal themselves through a constellation of signals: extreme valuations, narrowing participation, new paradigm narratives, shortened time horizons, and—most dangerously—widespread conviction that risk has disappeared.

The anatomy of bubbles remains consistent because human nature remains consistent. We still experience fear of missing out, still rationalize purchases after making them, still mistake rising prices for validation of our analysis.

This doesn't mean every price increase is a bubble or that you should avoid all rising markets. It means understanding where you stand in a recurring cycle. The best returns often come from recognizing early stages; the worst losses from mistaking late stages for early ones.

Newton's failure wasn't mathematical—it was psychological. He knew the South Sea Company was overvalued. He bought anyway because watching others profit became unbearable. Three centuries of market evolution haven't changed that dynamic one bit.