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Chapter 3. Causing the Bubble > Why Did the Bubble Form?

Why Did the Bubble Form?

The bubble formed when many venture firms and investment banks altered their decision rules to exploit a growing public enthusiasm. The VCs gave up their traditional rules for making investments; the accountants began to accept questionable revenue booked by the dot-com companies; the investment banks abandoned their traditional rules for deciding which companies to take public. Finally, large investors such as mutual funds changed their own rules—their spending habits and attitudes toward risk. The Internet boom was greatly facilitated when many financial firms veered from their traditional operating requirements.

The excuse offered by each of these companies for the changes it made is that the circumstances demanded the changes. Those financial firms which were getting into the Internet game were showing much higher rates of return on their investments, so that those firms which were not began to lose the interest of the investing public. Every venture firm, every accountant, every bank had to get in to the dot-com game in order to be able to stay in its business—to get clients and make money. If others were doing it, those who didn't would get left behind—money would go elsewhere. So the rules changed and the bubble expanded.


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