My sociological hypothesis is that this behavior is not driven by any utility considerations in the economic sense (these guys have more money that they can possibly spend on their own utility in their lifetime), but by competition for status position, or keeping up with the Joneses of a sort. If investor A decides to invest in X, investor B is likely to counter that with his own bid regardless of the risk. It is so, because if X fails, both A and B are in the same relative position vis a vis each other, i.e. noone gains a position vis a vis the other, but if X succeeds and B fails to invest due to risk considerations, then B loses his position vis a vis A. Therefore, when defined in terms of competition for status position, the cost of investing regardless of risk is lower than that of not investing due concerns over excessive risks.
Wojtek
On Wed, Jan 25, 2012 at 11:51 PM, michael perelman
<michael.perelman3 at gmail.com> wrote:
> I have always enjoyed the stories about speculative insanity in
> Mackay's Extraordinary Popular Delusions and the Madness of Crowds. I
> was surprised to read the New York Times reporting that nothing has
> changed in the last century and a half. First, here is a famous
> snippet from the book:
>
> Mackay, Charles. 1852. Extraordinary Popular Delusions and the Madness
> of Crowds (NY: Noonday, 1932).
>
> 55: One projector set up a company to profit from a wheel for
> perpetual motion. Another projector proposed "A company for carrying
> on an undertaking of great advantage, but nobody to know what it is."
> "Next morning, at nine o'clock, this great man opened an office in
> Cornhill. Crowds of people beset his door, and when be shut up at
> three o'clock, he found that no less than one thousand shares had been
> subscribed for, and the deposits paid. He was thus, in five hours,
> the winner of 2000 pounds. He set off the same evening for the
> Continent. He was never heard of again."
>
> Bilton, Nick. 2012. "Disruptions: Tech Valuations Defy the Restraints
> of Reality." New York Times (23 January): p. B 4.
> http://bits.blogs.nytimes.com/2012/01/22/disruptions-the-sloshing-sound-of-tech-valuations/
>
> "Some investors no longer even need to hear about a company to hand
> out money. Jakob Lodwick, an entrepreneur and co-founder of Vimeo,
> recently raised $2 million simply on the promise that he might have a
> good idea for a company in the near future."
>
> --
> Michael Perelman
> Economics Department
> California State University
> Chico, CA
> 95929
>
> 530 898 5321
> fax 530 898 5901
> http://michaelperelman.wordpress.com
>
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-- Wojtek http://wsokol.blogspot.com/