Noise trader risk

Everything is easy to explain and understand in hindsight. However, at the time many people were saying that technology would change the world. They were also looking at the best example of a technology company that they had - Microsoft. There are of course many reasons why Microsoft is successful, but one of them is that it was the first to sell a mass-market operating system. There was (and is if we look at Google, EBay, Apple's Ipod) an argument that says that if you are first into the market, network effects will mean that you can create a monopoly that will generate huge future revenues. At least some of the rapid appreciation of technology companies was the attempt to find these new firms with "first-mover advantage".

In retrospect, there are only a few firms that can prevent others entering the same market. The network effect that makes Microsoft operating system (and even more so) Microsoft Office more valuable the more people use them, does not extend to all products. Just because I sell dog food over the internet, does not mean that others cannot do the same. However, at the time this was less clear than it is now. If it were clear, why weren't all those people who now say that they could see the writing on the wall selling these over-valued shares and pushing the price back towards fair value.

The first answer to this is that it is only clear now in the cold light of day. Many of those who say that they were shouting "stop" were actually shouting "buy". The second answer is that there is a risk that share prices continue to move against you even if you know that they are over-valued. People do not have unlimited finance or confidence to continually bet against the hurd.

The main academic paper on this is

Noise trade risk


On a more practical note -

Tony Dye

Tony Dye was trying to act against the market. His employers lost patience just at the moment that he was being proved right.

Regards,