The Dot-Com Bubble Case Study

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Shiller attributes the creation of the dot-com bubble to structural, cultural and psychological factors. Structural factors include investor expectations and the feedback theory of bubbles. According to Shiller, most individual investors do not make their decisions based on careful calculations. Quantitative evidence discovered by experts has little meaning to them. During the 1990’s investors perceived the stock market as “the only game in town” (Shiller, 2015). Moreover, the stock market was a success story for so many investors since the late 1980’s. This created high expectations for the markets future performance. Investors did not want to regret a chance they did not take. Consequently, the market was crowded with investors who randomly …show more content…

In order to attract larger audiences, the financial news media shifted its focus from objective reporting to a more spectacular coverage. Experts were interviewed when they had news that stimulate the confidence of investors. The most prominent subject of discussion was the expected advent of a new era economy. This term is nowadays the second most famous phrase after irrational exuberance to describe the rise of the dot-com bubble. Investors did not just think that the internet will change the daily life of Americans but also the quantitative realities of economics and finance. Thus, skyrocketing P/E ratios seemed to be the new normal of stock …show more content…

In march 2015 the NASDAQ index which primarily tracks tech stocks declined 78 percent (Time, 2015). Although the internet changed the daily life of many Americans, it did not change the basic laws of economics and finance. The dot-com bubble of the 1990’s illustrates that there is no constant perfect correlation between the underlying true value of a company and its stock price. Therefore, the Efficient Market Hypothesis must be false in the short term. Nevertheless, the market adjusted in 2000 and stock prices moved closer towards their intrinsic value. This indicates that markets correct themselves in the long term. This conclusion has important implications for any

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