What Role did Investor Sentiment Play in Creating the Dot-Com Bubble?
Investor Sentiment: The Rise of the Digital Noise Traders Figure 1: The NASDAQ Composite Index Pre and Post Dotcom Bubble Source: Quartz The dotcom bubble culminated in the demise of numerous internet-based enterprises, including Pets.com and Webvan, while others such as Amazon and eBay survived the bubble bursting and emerged as industry behemoths. Investor losses during this period were massive, estimated at approximately $5 trillion (source: CFI ) by 2002, shown by the downfall of the NASDAQ Composite Index in Figure 1. The exuberance surrounding internet companies led to inflated stock prices, driven primarily by speculative fervour rather than intrinsic value. Investor Sentiment Explained, and how this links to the Dot-Com Bubble: Markets are efficient by definition when investors are rational. However, this speculative fervour mentioned above is one example of non- Bayesian expectation formation. Investors often do not look at the levels of final wealth they can attain bu...