The Informationist

From Investor Fantasy to Regulatory Nightmare:

Bad Network Economics and the Internet’s Inevitable Monopolists

Harvard Journal of Law & Technology: Volume 16, Number 1 Fall 2002

The Internet investment bubble has come and gone. For a few years in the late 1990s, it seemed as if the people, companies, and organizations tied to the Internet could do no wrong. That perception changed abruptly, and it now seems as if they can do no right. In the meantime, large numbers of Internet firms were formed, spun out to the public, and valued at outrageous levels by ravenous equity markets. Many Internet companies took full advantage of this nearcanonization; they ran through obscene amounts of cash and burned out as quickly as they had been born.

Pundits have been able to see the inevitability of the bubble’s deflation with perfect hindsight. Ex post discussions of the bubble tend to include pejoratives like “Ponzi scheme,” “irrational exuberance,” “mania,” or the seemingly more neutral “widespread accounting irregularities.” At the same time, more than a handful of those able to exercise this hindsight lost fortunes during the bubble, some made fortunes, and quite a few undoubtedly did both.

The current widespread recognition that the downturn was inevitable notwithstanding, many questions about the bubble remain. One such question is why it occurred. Simplistic references to manias and to crowd psychology are less than entirely compelling. After all, such attitudes could be applied to any industry at any time. The unanswered question remains: Why technology stocks in the late 1990s? What was it that made these investments so attractive during that brief period? Even Ponzi schemes need a reasonable initial pitch to get started. The answer must be that investors misunderstood something. But what was that something?

Read full publication here.

Posted by Bruce Abramson from on 11/01 at 08:24 PM in The Not-Quite-Yet Information Economy