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Bubble Investors:Bubble Investors:What Were They What Were They
Thinking?Thinking?
Ravi Dhar, Yale SOMRavi Dhar, Yale SOMWilliam N. Goetzmann SOM/HBSWilliam N. Goetzmann SOM/HBS
Behavioral Finance…Behavioral Finance…
Cognition matters.Cognition matters.Hard to get into the mind of the investor.Hard to get into the mind of the investor.Let’s ask them.Let’s ask them.
Polling Investor ThinkingPolling Investor Thinking
Benefits: Contextual, actual decisions.Benefits: Contextual, actual decisions.Drawbacks: depend on framing and Drawbacks: depend on framing and recollection recollection –– retrospective biases.retrospective biases.Bob Bob Shiller’sShiller’s Investor Confidence Surveys.Investor Confidence Surveys.Ivo Welch’s surveys of finance professors.Ivo Welch’s surveys of finance professors.MIT studies of investor physiology.MIT studies of investor physiology.
This StudyThis Study
A classA class--action lawsuit.action lawsuit.Point of law: class definition hinged in part on Point of law: class definition hinged in part on whether investors whether investors believedbelieved the market was the market was efficient.efficient.Also, whether they conditioned decision upon Also, whether they conditioned decision upon the stock price.the stock price.Our role:Our role:–– Assess beliefs about efficiency.Assess beliefs about efficiency.–– Assess motivations for trade.Assess motivations for trade.–– Consider the general and the particular.Consider the general and the particular.
ResultsResults
Evidence inconsistent with belief in the Evidence inconsistent with belief in the Efficient Market Theory.Efficient Market Theory.Strong belief in the value of personal and Strong belief in the value of personal and professional equity research.professional equity research.Price trends matter to valuation.Price trends matter to valuation.Belief in Belief in overover--reaction to news.reaction to news.Rational bubble beliefs.Rational bubble beliefs.
Efficient Market BeliefsEfficient Market Beliefs
Weak form: Weak form: –– past price trends not useful.past price trends not useful.
SemiSemi--strong: strong: –– public news rapidly and fairly impounded in public news rapidly and fairly impounded in
prices.prices.–– Stocks are not “overStocks are not “over--valued” or “undervalued” or “under--
valued”valued”–– Personal researchPersonal research
MethodologyMethodology
Telephone questionnaireTelephone questionnaire–– Just before noJust before no--call listscall lists
Investors who bought telecommunications Investors who bought telecommunications stock X 11/1999 to 12/2000. NOT stock X 11/1999 to 12/2000. NOT employees.employees.Stock near its peak in 11/1999Stock near its peak in 11/1999
Target AmericaTarget America
Affluent pool, philanthropic givingAffluent pool, philanthropic giving156,319 called 156,319 called –– (very expensive!)(very expensive!)
16,733 spoke to us and qualified 16,733 spoke to us and qualified –– (amazing number of buyers of the stock)(amazing number of buyers of the stock)
845 completed the survey 845 completed the survey –– (5% response rate)(5% response rate)
High standards of monitoring, randomization of High standards of monitoring, randomization of questions etc.questions etc.
Sample Bias?Sample Bias?
Buyers of individual stocks. Speculators by Buyers of individual stocks. Speculators by definition?definition?Buyers of telecom in late 1999Buyers of telecom in late 1999--early 2000. early 2000. Speculators by definition?Speculators by definition?Wealthy individuals Wealthy individuals –– educated?educated?Inference about broad population.Inference about broad population.
How likely is that the price of an individual How likely is that the price of an individual stock is higher or lower than its true value?stock is higher or lower than its true value?
0
50
100
150
200
250
300
350
Extremely likely Very likely Somewhat likelyNot too likely Not at all likely Don't know
Which factor that you rely on in determining Which factor that you rely on in determining whether the price of a stock differs from its whether the price of a stock differs from its intrinsic value is the single most important?intrinsic value is the single most important?
0
50
100
150
200
250
300
The long term trend in the stock's price, say its price over the past 3 yearsThe short term trend in the stock's price, say its price over the past 3 to 6 monthsThe 52-week high and 52-week low price for the stockOpinion of my broker/financial advisorMy own research on company's financial information
If the price of the stock is close to its 52If the price of the stock is close to its 52--week week highhigh price, does it indicate to you that price, does it indicate to you that
the stock is...the stock is...
0
20
40
60
80
100
120
Very over-valued Somewhat over-valuedValued about the right amount Somewhat undervaluedVery undervalued Don't know
If the price of a stock is close to its 52If the price of a stock is close to its 52--week week lowlow price, does it indicate to you that the price, does it indicate to you that the
stock is...stock is...
0
20
40
60
80
100
120
Very over-valued Somewhat over-valuedValued about the right amount Somewhat undervaluedVery undervalued Don't know
If the long term trend in the stock price, say its If the long term trend in the stock price, say its price over the past 3 years, shows an steady price over the past 3 years, shows an steady
increaseincrease, does it indicate to you that the stock is..., does it indicate to you that the stock is...
0
50
100
150
200
Very over-valued Somewhat over-valuedValued about the right amount Somewhat undervaluedVery undervalued Don't know
If the long term trend in the stock price, say its If the long term trend in the stock price, say its price over the past 3 years, shows an steady price over the past 3 years, shows an steady
decreasedecrease, does it indicate to you that the stock is..., does it indicate to you that the stock is...
0
20
40
60
80
100
Very over-valued Somewhat over-valuedValued about the right amount Somewhat undervaluedVery undervalued Don't know
From you own research on a company, how From you own research on a company, how likely are you to identify stocks that are likely are you to identify stocks that are
either undervalued or overvalued?either undervalued or overvalued?
0
50
100
150
200
Extremely likely Very likelySomewhat likely Not too likelyNot at all likely Don't know/ it depends
Thinking in general about stocks prices and how they Thinking in general about stocks prices and how they change in response to the release of news and public change in response to the release of news and public
announcements about a company, do you think the price of announcements about a company, do you think the price of a stock tends to...a stock tends to...
0
100
200
300
400
Over react a good deal Over react somewhatReact about the right amount Under-react somewhatUnder-react a good deal Don't know/ it depends
How often have you purchased a stock that at the time How often have you purchased a stock that at the time seemed over valued but you purchased it any way because seemed over valued but you purchased it any way because
you thought that the price was likely to go even higher?you thought that the price was likely to go even higher?
0
50
100150
200250
300350
Very often OftenSometimes RarelyNever Don't know/ it depends
Thinking back to the FIRST time when you made Thinking back to the FIRST time when you made your purchase, did you believe at the time of your purchase, did you believe at the time of
purchase that the price of stock X was ...purchase that the price of stock X was ...
0
50100
150200
250300350
Very over-valued Somewhat over-valuedValued about the right amount Somewhat undervaluedVery undervalued Don't know
Which one reason that you rely on in determining that Which one reason that you rely on in determining that Stock X was overvalued at the time of the FIRST purchase Stock X was overvalued at the time of the FIRST purchase
was the single most important?was the single most important?
0
20
40
60
80
The long term trend in the stock's price, say its price over the past 3 yearsThe short term trend in the stock's price, say its price over the past 3 to 6 monthsThe 52-week high and 52-week low price for the stockOpinion of my broker/financial advisorMy own research on company's financial information
Did you purchase Stock X anyway because you expected Did you purchase Stock X anyway because you expected the price to continue go higher, to diversify you portfolio or the price to continue go higher, to diversify you portfolio or
for some other reason?for some other reason?
0
50
100
150
200
I expected the price to continue to go higherTo diversify my portfolioOther Don't know/ No Answer
A "bubble" is defined as a time when stock prices are A "bubble" is defined as a time when stock prices are considerably above their true value. In your opinion, was considerably above their true value. In your opinion, was
the recent peak in telecom share prices...?the recent peak in telecom share prices...?
0
100
200
300
400
500
Definitely a bubble Probably a bubbleProbably not a bubble Definitely not a bubbleDon't know/No Answer
ConclusionsConclusions
This group holds beliefs contrary to EMH.This group holds beliefs contrary to EMH.Beliefs consistent with a model of personal Beliefs consistent with a model of personal research identifying underresearch identifying under--valued and valued and overover--valued securities.valued securities.Signs of contrarianism.Signs of contrarianism.Direct admission of bubble investing.Direct admission of bubble investing.
