The Inflating Bubble
Everyone dreams of making a fortune. These days, the easiest way to do that is on the internet, or so it would seem. A memorable scene from the film, “The Social Network” is where the Sean Parker character leans across the table to the founders of Facebook a mutters, “A million dollars isn’t cool. You know what’s cool? A billion dollars.” In Silicon Valley, it is becoming a trend for investors to sink large sums of money into startup companies with sometimes only small ideas in place. The successes of start-ups such as Twitter, Farmville, and Groupon have made their founders billionaires. A variety of new companies that involve shopping and social networking a finding an easy time grabbing investors because none of these investors want to miss the next big thing.
Many of the investor capitalists in Silicon Valley are skeptical about the inflation bubble that is once again forming around internet start-ups. Many believe that the rush of investors and the large sums of their investments are just an example of “herd mentality.” Herd mentality is similar to the concept of information cascades covered in class. Herd mentality is the concept that describes how people can be influenced by their peers to adopt behaviors or purchase products and follow trends. Many of the investors in the Silicon Valley feel that this increased trend in investments is simply investors acting the way they are because of the small number of large successes experienced by their peers. The cascade of information has led some people to make their decisions based mostly on the positive signals received from success stories. These have led them to invest larger sums of money than may be wise. Others feel that investing in small technology start-ups has become something of a hobby in Silicon Valley. In this case, the cascade would be to follow the trend just because it is a trend, and people get their enjoyment/positive signal from being “one of the crowd” that invests large sums of money. This could be sort of a status symbol.
This herd mentality and information cascade could lead to another bubble that will eventually burst one day, making a case for why information cascades can be negative and lead herds in the wrong direction.