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What caused the dot-com bust?


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#1 deathtrap   Members   -  Reputation: 364

Posted 19 February 2006 - 06:37 PM

I was around the age of 16 when the dot-com bust happened(2001 IIRC), so I didnt pay much attention to it, all i knew was that the NASDAQ was crashing. What I don't know is what caused this? I heard from people that dot-com companies were creating companies, and taking investments from investors, but they didn't have any products, but this confuses me since why would an investor invest if there was no product meaning no forseeable income? anyone care to enlighten me on this subject or point me in the direction of some resources?

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#2 Mastaba   Members   -  Reputation: 757

Posted 19 February 2006 - 06:50 PM

Greenspan explained it perfectly, it was due to irrational exuberance.

#3 abstractimmersion   Members   -  Reputation: 100

Posted 19 February 2006 - 06:58 PM

Well, that's sort of right, if you take into account that Greenspan is a worthless and harmful person.

Basically, hype and marketing are the culprits, which no economist will ever account for. They believe that if a product sells (or it's stock), that there is a demand in the greater market. They take no account as to advertisers and others creating a market (or buy situation) because that makes economics too complicated, and it goes against what Adam Smith had to say about it. It's especially funny since Mr. Smith did not live in the days of TV or radio, ie, he lived before any modern concept of advertising. (or hype)

#4 kSquared   Members   -  Reputation: 1356

Posted 19 February 2006 - 07:10 PM

Short answer:
Buy Benjamin Graham's "The Intelligent Investor". Read. Learn. Enjoy.

Slightly less short answer:
A disastrous combination of irrational exuberance, gross overspeculation, and belief in the "bigger fool" theory -- that is, no matter how much you paid for X, there is always someone out there willing to pay more.

edit:
Greenspan is most certainly not a "worthless and harmful person". You might disagree with some of his policy decisions, but making unsupported blanket statements like this one are silly.
- k2
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#5 abstractimmersion   Members   -  Reputation: 100

Posted 19 February 2006 - 07:14 PM

perhaps, but Greenspan is known as the guy who "made central banking work."

in a related note, the fed was established in 1913 to "protect the value of the dollar." since then it has dropped in value 95%.

I don't trust central banking, and I don't ever trust a private monopoly over a country's currency.

#6 Avatar God   Members   -  Reputation: 1072

Posted 19 February 2006 - 07:34 PM

Quote:
Original post by abstractimmersion
perhaps, but Greenspan is known as the guy who "made central banking work."

in a related note, the fed was established in 1913 to "protect the value of the dollar." since then it has dropped in value 95%.

I don't trust central banking, and I don't ever trust a private monopoly over a country's currency.
A valid argument only if the dollar would have dropped more without the Fed. And, to be fair, the Fed does a lot for us.

But I'm going to go with "People finally realized the dotCom sector was a load of crock, and stopped putting money into it."

#7 abstractimmersion   Members   -  Reputation: 100

Posted 19 February 2006 - 07:36 PM

how can you defend the interest rates that casued the housing price boom? do you believe suburbs actually are worth as much as the realtors say? They produce nothing! and they depend on a worthless distribution of oil (ie, for consumer goods) to profit.

fuck greenspan, and fuck the central bank.

#8 abstractimmersion   Members   -  Reputation: 100

Posted 19 February 2006 - 07:39 PM

the #1 purpose of the central bank (the fed) is a rosy US economy and I don't know how anyone can argue with that, or what malfunctions that philosophy may cause.

#9 LessBread   Moderators   -  Reputation: 1411

Posted 19 February 2006 - 07:56 PM

It was a case of tulip-mania.

#10 abstractimmersion   Members   -  Reputation: 100

Posted 19 February 2006 - 08:04 PM

Again, it's not possible that powerful (monetary) forces may influence the market, is it?

#11 shmoove   Members   -  Reputation: 829

Posted 19 February 2006 - 08:13 PM

To put the dotcom burst in layman's terms:
Everybody got excited about this new online market, a lot of companies popped up in order to take advantage of it, people were eager to invest in anything that had "internet" somewhere in the business plan, but they forgot to look for actual ways to make money off of their ventures. They just thought, let's get people browsing our sites and we'll figure out the rest later.

On day, investors started asking "OK, so how do we get our money back?", entrepeneurs said "Oohhh, I'm not sure... [insert string of buzzwords here]", investors started pulling their money out, the market crashed.

shmoove

#12 LessBread   Moderators   -  Reputation: 1411

Posted 19 February 2006 - 08:14 PM

Quote:
Original post by abstractimmersion
Again, it's not possible that powerful (monetary) forces may influence the market, is it?


It's 100% possible, just ask George Soros.

#13 shmoove   Members   -  Reputation: 829

Posted 19 February 2006 - 08:24 PM

Quote:
Original post by deathtrap
why would an investor invest if there was no product meaning no forseeable income?


Nerds with charisma dazzling them with words they didn't know the meaning of. And big numbers (everything on the internet comes in large quantities), big numbers are always impresive.

This was a market investors knew nothing about. Making money was something most techies knew nothing about. That combination spelled disaster.

shmoove

#14 Binomine   Members   -  Reputation: 538

Posted 19 February 2006 - 09:20 PM

This is my own opinion.

Basically, the Net was a new thing. No one thought to apply buisness logic to it.


Here's the basic list of companies that failed.

1. Doing something with the Internet that makes no business sense, such as an application that can change your screen resolution anywhere in the world. Since it was on the Internet, everyone was excited and no one thought about making a profit. Hence the old south park meme.
Step 1. Do something
Step 2. ???
Step 3. Profit.

2. Doing normal business, but trying to undersell everyone beyond the business's means. Pets.com is a great example, free 50 pound bag of dogfood, limit one, just pay shipping. Free shipping with coupons.*

3. Instead of investing money in Widget X, let's simply do it in our garage in 1/3 the time it should take to properly engineer Widget X. Then promote it as if we spend the time to properly engineer it, watch it not deliver what we promise, and all the investers leave immediately for the next Widget X.

This is one half of the dot com bust. The most important part is, Internet stock companies. Most people didn't want to set up a broker to trade stocks, so the only other ways for them to trade stocks is either directly from the company or through limited bank hours. Thanks to stock trading websites, the stock market became easily accessible and people invested in it. And most people invest in companies they know, which, since we're using the Internet, is a lot of Tech heavy stocks.

When those stocks failed, the money left.

*The whole 50 pound bag of dogfood at pets.com is a strange one. I don't remember the whole story.

#15 Eelco   Members   -  Reputation: 301

Posted 19 February 2006 - 09:32 PM

Quote:
Original post by abstractimmersion
Basically, hype and marketing are the culprits, which no economist will ever account for. They believe that if a product sells (or it's stock), that there is a demand in the greater market. They take no account as to advertisers and others creating a market (or buy situation) because that makes economics too complicated, and it goes against what Adam Smith had to say about it. It's especially funny since Mr. Smith did not live in the days of TV or radio, ie, he lived before any modern concept of advertising. (or hype)


a good product sell itself: except in a day and age where noone really needs anything anymore anyway. (anyanyany, lol, is that valid english?)

#16 LessBread   Moderators   -  Reputation: 1411

Posted 19 February 2006 - 09:35 PM

Quote:
Original post by Eelco
a good product sell itself: except in a day and age where noone really needs anything anymore anyway. (anyanyany, lol, is that valid english?)


Um, noone isn't a word [grin]

#17 Eelco   Members   -  Reputation: 301

Posted 19 February 2006 - 09:47 PM

Quote:
Original post by LessBread
Quote:
Original post by Eelco
a good product sell itself: except in a day and age where noone really needs anything anymore anyway. (anyanyany, lol, is that valid english?)


Um, noone isn't a word [grin]


i know, it just feels so much better fonetically/metrically.

#18 ToohrVyk   Members   -  Reputation: 1591

Posted 19 February 2006 - 09:50 PM

Quote:
Original post by abstractimmersion
They believe that if a product sells (or it's stock), that there is a demand in the greater market.


Well, demand is defined as the amount of product that the greater marked intends to buy in a given situation, so if a product sells, this pretty much means there is some demand.

Also, there was high demand for start-up stock during the dot com bubble, and it only burst when the high levels of demand collapsed.

Quote:
They take no account as to advertisers and others creating a market (or buy situation) because that makes economics too complicated, and it goes against what Adam Smith had to say about it.


I'm sorry, but Adam Smith is quite outdated as a mathematical framework (was it ever?). While his general ideas still apply and provide good intuitions of what is going on in certain situation, there are many theorems that are much more specialized and more useful when you actually try to compute cold, hard numbers. And these are quite adapted to many other situations as well.

However, you must realize that advertising and marketing are by no means something that destabilizes the market. Seen from the market, they are merely a shifting of the demand curve, which is one of the most basic things one can think of in that field (compared to, for instance, collaborative games or oligopsonies). Economists have no trouble whatsoever modelling the impact of advertisers onto the market.

#19 ToohrVyk   Members   -  Reputation: 1591

Posted 19 February 2006 - 09:59 PM

Quote:
Original post by deathtrap
I heard from people that dot-com companies were creating companies, and taking investments from investors, but they didn't have any products, but this confuses me since why would an investor invest if there was no product meaning no forseeable income?


There are two main reasons.

The first is the Market Efficiency hypothesis. It states that everyone is so smart, every information about the outside world is reflected in prices. That is, as you said, nobody would invest in worthless stock, and everyone would invest in good companies, so the prices reflect the inherent value on the long run. While that hypothesis is verified on long-known companies and indices, it is obviously wrong in a state of hype, where everyone trusts the others and everyone is wrong. If everyone on the stock market told you that such-and-such was the next Microsoft, and everyone was buying into it, wouldn't you want to be a part of it as well? Well, if you don't many gullible people would and it would end up the same.

The second is the Greater Fool hypothesis. It states that there is always a greater fool. If you buy today foolishly, you'll find someone even crazier willing to buy from you at a greater price. For instance, you buy in on a young stock at a low price. Since you know that prices in that sector increase dramatically, you wait for it to be large enough (say, 200%) and then sell. If you're lucky, enough people around believe that the prices will go even higher (the greater fools) and will buy from you. You tripled your starting capital at no cost, even if you don't believe in the intrinsic value of said stock. So people buy and sell, until the growth collapses and the greatest fools lose all.


#20 Kevinator   Members   -  Reputation: 229

Posted 19 February 2006 - 10:08 PM

Too many people generating money from money and it came back to bite them in the ass




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