Speculative bubbles can wipe out investors in great numbers, yet nobody seems to learn their lessons. Prof. Valliere tries to explain why this clearly irrational behavior persists by examining the phenomenon from a historical perspective.
The article identifies key bubbles in five centuries from the History of Venture. It compares the attributes of representative bubbles from the Dutch tulip bubble in 1637, through the south sea bubble, the British railway mania of 1846, the California Gold Rush, the great stock market crash, and on to more recent ones such as the Dotcom bubble and the Subprime crisis of 2008.
The reason why bubbles happen again and again, the author argues, is because of the bounded rationality of venture actors. These players in the venture ecosystem convince themselves that each bubble is in fact not a bubble; that it is somehow different from previous ones. This negates their ability to learn from the bitter experience of their predecessors, with the inevitable disastrous outcome for their own investments.
To avoid being trapped into making the same error, you would do well to heed Valliere’s concluding advice, which also draws on the historical lesson: avoid accepting the hype, identify the likelihood of a bubble as it forms, and adopt the ”pickaxe” philosophy – remembering that in the California Gold Rush the group of entrepreneurs that came out ahead were not the eager prospectors, but the shopkeepers who sold them tools and supplies.
Appeared in CVR Issue 2 – History of Venture
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