In most recent bubble scenario, stock market trends to begin and end with periods of frenzied buying (bubbles) or selling (crashes). The herding behavior that irrational and driven by emotion and influenced the dot com bubble and bust.
This paper will i, explores difference phrase of Dot.com bubble and crash in which behavioral and psychological, ii, and explore how information cascades lead to herding, confirmation bias, and overconfidence in unjustified stock valuations and how this occurred in the Dot.com Bubble and Crash.
The dot com bubble was a financial crisis during 1990’2000s. It push the NASDAQ peaking at 5,408.60. the stock price rise rapidly in the Internet sector and related fields.
According http://en.wikipedia.org/wiki/Dot-com_bubble, The period was marked by the founding (and, in many cases, spectacular failure) of a group of new Internet-based companies commonly referred to as dot-coms. Companies could cause their stock prices to increase by simply adding an “e-” prefix to their name or a “.com” to the end, which one author called “prefix investing.”
A combination of rapidly increasing stock prices, market confidence that the companies would turn future profits, individual speculation in stocks, and widely available venture capital created an environment in which many investors were willing to overlook traditional metrics, such as P/E ratio, in favor of basing confidence on technological advancements.
The collapse of the bubble took place during 1999’2001. Some companies, such as Pets.com, failed completely. Others lost a large portion of their market capitalization but remained stable and profitable, e.g., Cisco, whose stock declined by 86%. Some later recovered and surpassed their dot-com-bubble peaks, e.g., Amazon.com, whose stock went from 107 to 7 dollars per share, but a decade later exceeded 400.
What factors caused bubble?
There are there psychological based components of bubble that will demonstrated as follow:
1. Confirmation Bias is mean investors were acquire information selectively, that supports the recent performance of stock market, and ignore the opposite. Taffler and Tuckett (2002) research on the Dot Com bubble and crash, and gave a description of investor behavior in the efficient markets view of rational decision-making based on all relevant information. They clear that people do not share a common perception of reality; instead everyone has their own psychic reality. These psychic realities will have varying degrees of connection with objective reality. Decisions are driven by psychic reality, which is a realm of feelings and emotions. Reason may be secondary to feeling. Feeling affects the perception of reality. People are seen as engaging in wish-fulfilment wherein they perceive reality so that it accommodates to what they want. People see what they want to see. Unpleasant aspects of reality may be subject to denial, which is the pretense that unpleasant events and situations have not happened. Denial reduces the ability to learn from unpleasant experiences, since unpleasant experiences are removed from conscious awareness.
The unconscious mind operates as a censor that keeps out unpleasant information. People are constantly bombarded by far more information than the human mind can handle. The unconscious mind reduces incoming information to a quantity that can be dealt with. Although much of this rejected information is rejected because it is peripheral to needs, some information may be rejected because it is unpleasant. The conscious mind, the mind of which we are aware, does not receive complete information. The efficient markets view of rational investors who base decisions on all relevant information does not sit comfortably with this psychoanalytic view of mental processes.
In relation to stock market bubbles, the psychoanalytic view of Taffler and Tuckett sees stocks as taking on a significance for the unconscious mind, which reflects experiences of infancy. The unconscious mind has considerable influence over thinking and decision-making. Since people are not aware of their unconscious minds, they are not aware of the influence of the unconscious mind over decision-making. The unconscious mind may exclude uncomfortable aspects of reality from awareness. When the bubble bursts, and prices fall, it becomes impossible to completely exclude unpleasant p32 aspects of objective reality from awareness. Feelings of anxiety, loss, panic and shame emerge. Selling the shares as quickly as possible could then become part of the process of denial.
Confirmation bias may have caused investors to ignore, or at least give too little weight to, such positive news.
The bubble and crash was particularly clear in the case of technology stocks. The NASDAQ index, which focuses on technology stocks, rose more than six-fold between 1995 and early 2000. It then lost more than three quarters of its peak value by late 2002