Perhaps one the first well documented instances of this strange behavior is the tulip bulb mania of the mid 17th century in Holland.
Since then there have been many bubbles included the internet bubble of the early 21st century. The latest such is obviously FaceBook.
Normally stock is a financial instrument in which people supposedly invest to get a better return than your basic savings account. Thus it is supposed to be a cold, rational, calculated decision and is all about pricing and potential return.
Since FaceBook does not have any assets to speak of one has to look at earnings and profit to get a sense of a "fair" or reasonable value of the company. Last year the company apparently had a $1 bio profit (assuming this was not artificially inflated by creative accounting to better position the company for the coming IPO).. it seems there are about 2.5 bio shares.
On the basis of its current earnings and profit FaceBook stock then is worth between $3 (conservative, if you bought the whole company at that price you'd have to wait 7.5 years to get your money back) to perhaps as high as $10 (for those who are really bullish and hope profits will increase significantly).
Yet it sold at $38 (currently around $32). Best case scenario, its profit would have to more than triple before investors start seeing a return on their investment.
But this question is not about FaceBook. It is about why people historically tend to buy overpriced financial instruments. Ignorance is no longer an explanation, as everyone had access to FB financial info, a calculator and presumably learned some basic math in high school.
Is it a gambling instinct lurking around (what if this thing by miracle really takes off ????). Or is it the old " there is no investor that cannot be fooled at least twice"
And what does it say about markets ? If people pay irrational prices for any goods, then "natural" price regulation by markets is not really working.
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