Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
Financial Bubbles
The technology boom in the 1990s provides a valuable illustrative case for learning about financial bubbles. The advent of the Internet in 1994 provided the genesis for a run on financial stocks, much in the same way that previous bubbles in things like railroads occurred. The fundamental principle behind the bubble was that investors felt that the new technology was transformative, that the transformation would result in massive stock market winners. Being outsiders with little to no knowledge of the industry, most investors then make irrational investments to anything in the industry, leading to a speculative boom.
Under normal market conditions, a baseline assumption is that investors are rational, meaning that they pay more or less fair market value for things. However, to invest rationally one must understand that in which they are investing. The 1990s saw a rapid increase in the commercialization of the Internet. Investors neither particularly understood the technology, nor was there a coherent sense in the market of the potential of this technology. Combined, investors found themselves with a rapidly-growing industry of uncertain commercial promise, but that seemed like it could become a commercially dominant phenomenon (Investopedia, 2016).
The...
The sources of this capital, however, knew nothing about the Internet and were simply seeking to score a big return on the new technology. Without the knowledge, however, there was a lack of ability to discern good from bad among companies. Venture capitalists, normally more cautious in their investment, poured money into all manner of companies based purely on speculation. Many such companies had no underlying business to speak of, or at best were many years away from profitability. Normally, a company with no underlying business could never receive venture capital, much less go public, but during the bubble they did, because there were many more investors among the general public who wanted in on the action (Investopedia, 2016).
Underlying this was irrationality. This level of irrationality had been seen before in bubbles. One key element is that the industry has to be nascent, such that most investors have insufficient knowledge to invest rationally. The industry, however, must also hold tremendous promise. In many prior bubbles, such as with railroads, or the South Sea bubble in 1720, the vague idea that the new industry will result in great riches for investors helps to convince…
References
Investopedia (2016).. Dotcom bubble. Investopedia Retrieved July 13, 2016 from http://www.investopedia.com/terms/d/dotcom-bubble.asp
Ofek, E. & Richardson, M. (no date). The valuation and market rationality of Internet stock prices. NYU Stern School of Business. Retrieved July 13, 2016 from http://pages.stern.nyu.edu/~eofek/DocComValuation.pdf
Many laws have been successful in restricting such practices in order to avoid a similar situation in the future. Today, "when a mortgage borrower wins a rescission case in court, the bank loses the right to foreclose, and has to give up all profits from interest and fees on the loan" (Carter, 2012). However, just a few years after predatory lending caused so much damage, there are already movements
Financial Stability Through Bank Diversification The banking industry of the United States of America is witnessing a major shift in the revenue making procedures. The banks are now inclined towards generating income from non-interest-based sources such as fee income, service charges and trade revenue etcetera instead of the traditional process of loan making. Noninterest income has always played an influential role in the revenue generation of the banking system. It'd evident
Financial Derivatives This study emphasized the importance roles of financial derivatives, which has been known for the last decade and its effects on the Global financial crisis. It further analyzes the impact of financial derivatives and how it can be controlled to prevent corporations from incurring a lot of risks. It also explains the existence of financial derivatives since 1970, to the recent Global Financial Crisis which occurred in the 2006. Risk
Financial Crisis and Its Implications: Events Occurring Between 2007 and 2009 A Critical Literature Review The Roots of the Crisis Real Estate Valuation Bubble Sub-Prime Mortgages Low Interest Rates Moral Hazard in Regard to Consumer Spending Packaging Real Estate Loans as a Commodity (Derivatives) Market Interrelatedness Future Implications The financial crisis, which seemed to be elevated to its greatest extent world-wide between the years 2007 and 2009, is difficult to unravel. The causes, interlink-ages, and effects are so intertwined that
These borrowers had -- knowingly or not -- been gambling on a real estate market they did not understand. Understanding the complexities of the real estate market and fiscal policy is complicated -- those who have grown up without access to the best education and who do not have experienced friends and family to help advise them in this process were the most vulnerable. Squires, Hyra and Renner showed that
Financial Proposal: Dorchester, Ltd. As discussed in earlier papers, for Dorchester, the final decision as to which particular nation to invest in is dependent on a range of distinct scenarios; these factors naturally impact the selected acquisition target. Before the acquisition target is selected, the nation which houses the potential acquisition target needs to be scrutinized closely. For instance, the trade environment of the nation where the prospective acquisition is located