This is a short write-up I had prepared for discussion with a senior personnel in a prominent investment bank. The context was the pattern of stock prices in recent times of popular IPOs in the tech-space (more specifically, social-media space).
I feel that currently the "theory of conspicuous consumption" by Thorsten Veblen holds lot of merit. If you remember, in our last meeting, I had pointed out that the rules of demand and supply don't really work these days in the stock market. Ideally, the demand and price of a product should be inversely related, and so we should be seeing less demand as price of a stock goes up. But the prices of the social-media stocks did not really stick to that.
While there is a lot of talk about an internet/tech (though tech would be incorrect because we don't see a lot of buzz in other tech-related fields apart from social networking websites) bubble, and even a more specific social media bubble, I feel it is only apt to extend it to call it as a "social" bubble since we see that it's not only the social media websites which have caught people's imagination, but virtually everything which has something to do with people around us. The connectivity among people is growing. Today we know more about what our neighbour is doing than ever. And it's basic human instinct that we tend to do what someone else is doing, or try to do it better just to be noticed. In the process, we fuel things beyond their correct valuation.
It is somewhat like the Keynesian Beauty contest where every person is trying to judge what everyone else is doing, and do the same. With access to information becoming easier, this is leading to people taking decisions less on the basis of fundamentals of a firm/stock, and more due to the "social" effect.
I would also like to draw your attention to this article by Peter Thiel - http://techcrunch.com/2011/04/
PS. Quite an abrupt ending, but then that is only what I was to write as a follow up of my discussion with this person. Would love to know your views.
