Tuesday 20 May 2008

Justifying Irrational Purchase Decisions

When an investment seems overpriced, when the purchase seems completely irrational, we can be talked into accepting it by thinking that 'this time it is different' there are now 'different market drivers' and things will never return to the 'old status quo'.

That was a motto of the Internet bubble, the heyday of delusional investing. Valuations in the fledgling industry made no sense, even with the most heroic assumptions about their earnings potential. But the sector was so appealing that investors created a new assumption - unfounded, as it turned out - that the world would change so fundamentally that valuation norms no longer applied.

This has also been happening since that time in the property industry, leading to an unprecedented boom and, ultimately, bust.

See full article here.


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