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Chapter 1. How to Use This Book > How This Book Was Written

How This Book Was Written

So a small team and I went to work studying the great Internet bubble. We looked at the various players who were involved in the process by which venture funds and entrepreneurs built companies, and then with the investment banks, took them public. We made a list of how the venture funds changed their investment criteria as the bubble developed, and how investment banks changed their criteria for taking firms public. We looked at how the mutual funds shifted their investment criteria so that many funds became loaded with dot-com and telecom stocks. We looked at Alan Greenspan's warnings, and at the inflation and then bursting of the bubble. We looked at who made money in the outcome, and who lost.

We have read the literature on financial manias and explored the explanations being given for the recent bubble. The key explanations are that (1) it was an accident: A group of forces came together like the perfect storm—new technology, an affluent investing public, and a booming economy—and then blew themselves out; (2) it was engineered: The incentive structures in financial service firms made their blowing up into a bubble a certainty; (3) it was a result of inexperience: Investment professionals (including the business press) were young and inexperienced, and believed that the New Economy was qualitatively different from the Old Economy so that valuations weren't recognized as inflated; and (4) it was another example of the madness of crowds—individual investors were prone to mass hysteria and didn't do their homework and so drove stock prices to unreasonable levels, and when the bubble burst, got what they deserved.


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