Behavioral finance and the dot- com bubble.

Discussion in 'Psychology' started by dianamah, May 17, 2007.

  1. dianamah


    The internet bubble is an example of a speculation bubble, which occurred in countries like Germany where the share prices of mostly new IT companies listed on the NEMAX ( now NASDAQ) index were driven at a level that left no insight for their fair values. It bursted on March 2000, almost at the same time as in the other Western nations who experienced a similar depression.
    The market cap of a company has two main components: the first derivate from the its earning power and is reflected by its intrinsic value. During the Dot- com bubble, basic concepts of company evaluation were not even taken in consideration. Companies like Mobilcom or Deutsche Telecom still experienced continuous rise in their share price allthough they were not able to generate positive operating cash flows and companies like Brokat or Kabel New Media, which were recommended by professional fund managers went bankrupt. The second part is the optional one, which is not defined by the fundamentals but the dynamic on the financial market.
    According to the traditional financial theories, especially the Efficient Market Hypothesis, such price deviation should not exist as the market assesses simultaneously all informations availaible and the investors are assumed to be rational and unbiased. But in the reality psychology patterns like anchoring, overconfidence or herding do influence their financial decisions and such behaviours are the ones that drive the optional component of the market caps and the overall index of the New Economy (NEMAX) at the level they were as the market collapsed.