Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Henry Blodget’s Irreplaceable Exuberance

In the New York Times of August 30, 2005, Henry Blodget tries to justify some of the things that happened during the internet boom and bust of the late 1990s. Henry Blodget was a well known internet stock analyst of that era and his actions invited regulatory sanctions that cut short his career.

Blodget is not saying anything new when he says that “stock prices and strategic decisions are based on predictions, and predicting the future in an industry’s early days is hard”. What is more interesting is his point that “our exuberance helps build industries, however boneheaded it may later seem”.

This is true if we define exuberance as a temporary reduction in risk aversion. Such a reduction will lead to investments with higher expected returns and from the point of view of a risk neutral observer, this is more rational. Since we are always risk neutral about the past, posterity will be happy that those investments were made.

Unfortunately for him some of the investments that were made at that time were not justifiable even if we ignore risk aversion. Yet, it must be said that compared to some of the nonsense that Blodget wrote as an analyst, what he is writing now contains a grain of truth even when it is largely self serving.


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