Introduction: The Research of Dot Com Bubble

Financial market is inherently instable but financial market has a learning mechanism. Forms of bubbles in the history are various but there is something invariant underlying these bubbles. And the thing is humanity. When moral hazard and adverse selection increased, things will go wrong. And one of the forms of it is a bubble.

 

It is not easy to define bubble as Peter Garber ever said that that bubble is “a fuzzy word filled with import but any operational definition.” Many economists tried to give a definition of bubble. Charles Kindleberger ever defined it as “a bubble is an upward price movement over an extended range that then implodes (Manias, Crashes and Panics).” “Bubbles are typically associated with dramatic asset price increases, followed by a collapse (Brunnermeier 2007)”. Among them, I like Peter Garber’s definition most (several economist defined it in this way like Mishkin and Eakins (2006)). He said that a bubble can be viewed as “a price movement that is inexplicable based on fundamentals.” I like it because it mentioned fundamentals. And fundamental is a concept valued by value investors and should be kept in mind by every investors.

 

Each of the bubble in the history is with lots of stories. Holland’s Tulip Mania can be traced back to 17^th but before that, such things did happened. The Mississippi bubble of 1720s had a profound effect. John Law, a superb gambler, whose financial theory has inspired generations of economists. Newton signed that “I can calculate the motions of heavenly bodies, but not the madness of people” after a failed investment in the South Sea bubble. Railway mania in 1840s and dot com bubble in the beginning of the C21th are brought by the new technology. Stock price bubbles and housing bobbles have taken place and are taking place in different places in the world under different circumstances.

 

 Each time I read again The intelligent investor, I couldn’t help thinking “What valuable comment Graham will give after the dot com bubble if this generous man is still alive?” This definitely motivated me to research into details about the dot com bubble. In my bog, I will explore what causes the dot com bubble combined with

the former research results. I will also explore what is the similarity of dot com bubble compared with other bubbles and what is the distinct place of it compared with others. At the end of the series of blogs, I will try to give some ideas with this bubble in Graham’s way and try to see if we can learn more from this bubble.

Reference:

 

Kindleberger, Charles P., and Robert Z. Aliber. Manias, panics and crashes: a history of financial crises. Palgrave Macmillan, 2011.

 

Mishkin, Frederic S., and Stanley G. Eakins. Financial markets and institutions. Pearson Education India, 2006.

 

Durlauf, Steven N., and Lawrence Blume, eds. "The new Palgrave dictionary of economics." (2008).

 

Garber, Peter M. "Famous first bubbles: the fundamentals of early mania." (2000).