irrational markets

Irrational Markets

People feel rage for different reasons – weak coffee, tube delays or no umbrella in the rain. We, on the other hand, feel that about neoclassical economics and particularly, irrational markets. This combined with the obvious overvaluation of specific stocks, encouraged us to spend a semi-significant time of research on the topic of irrational markets and social media companies’ stocks.

“In the world of technology stocks, it is February 2000 –
at least as measured by the NASDAQ Composite Index.”
(Mackintosh and Lex reporters, 5 March 2014)

Capital markets have substantially evolved from Adam Smith’s ideas of achieving economic progress in a pin factory through Keynes’ casino analogy of capital markets to Fama’s perspective on market efficiency. While Fama’s efficient market hypothesis has been continuously reinvigorated, lately there has also been a critical reaffirmation of the relevance of Keynes’ view of the ‘casino’ behaviour of the market. Thus, questions of the doubtful value of stocks in a time of upheaval have never been more relevant in light of the Dotcom, the US subprime mortgage, the UK housing and most recently, the social media bubble. In the series Irrational Markets, what we will attempt to illustrate is the holistic complexity of valuation, financial markets’ irrationality and initial public offering (IPO) by pointing out what direction we think the bubble is moving towards.

We would like to underline that we not intend to prove the existence of a social media or technology bubble; nor will we focus on the subsequent underperformance of firms which have issued an IPO under inflated fundamentals. We also do not attempt to ridicule all neoclassical theories which underline most, if not all, laissez-faire-based economies. Our main purpose is shed light on some of the theories (Part I, II and III) that explicitely highlight our belief that social media companies such as Facebook are a product of the application of the efficient market hypothesis in times of speculative, irrational and hype-induced trading.

We will be happy if at the end of it you as a reader are more confident in the concepts of shorting stocks, Panglossian finance, hot IPO markets and the related underperformance of shares, as well as the efficient market hypothesis. We will be even happier if you can see beyond the examples of the discussed stocks’ performance and way into what does this mean for our capital markets?

*February 2000 is a reference to the last month of rising internet stock prices, prior to the Dotcom crisis. This was the time when the NASDAQ index of leading internet stock spiked, just the ‘burst of the Dotcom bubble’.