Good Intentions, Bad Results
The dot-com bubble illustrates how expectations of future growth can outrun evidence about individual businesses. The model asks what information supports an investment story before money, time, or reputation is committed.
THE IDEA
Good Intentions, Bad Results
Good intentions and wishful thinking do not make a sound platform for investment. Whether we are investing our money, time, or reputation, it pays to be mindful of the information that underpins the structure in which we’re investing. How reliable is the information? And thus, how much can we bet on it?
Bubbles can form and pop quickly. In the late 1990s, the dot-com bubble illustrated the perils of investing based on optimism rather than solid information. Eager to capitalize on the new economy, investors started pouring money into any company associated with the concept of “dot-com.” The allure was based on a widespread belief that the internet would revolutionize business, providing new economic opportunities to those previously left out, and that absolutely any investment in this space would yield high returns. This enthusiasm led to a frenzy of overvalued stock prices as the demand for internet-company shares skyrocketed, with investors often disregarding traditional financial metrics such as profit and revenue.
The intention was to be part of a groundbreaking shift in the economy that would benefit the entire world. However, much of the information fueling this investment boom was unreliable and built on expectations of future growth with little evidence to back it up. In reality, many startups operated under untested business models. Their share price went up because the story they told was one of promise and hope. A few notable investors, including Warren Buffett, who opted not to participate in the bubble were cast as old and out of touch.
For a while, speculators bought the story, hoping there would be a greater fool later. As the results started to come in, and the underlying economic reality emerged, investors realized they could not be the one still at the ball when the clock struck midnight, and everyone wanted to exit all at once, causing a dramatic market correction. The resulting collapse wiped out vast amounts of wealth and underscored the importance of basing investment decisions on solid, reliable data, not hype.
When to use it
Evaluating startup investment opportunities
Assessing career moves based on industry trends
Deciding whether to adopt a new technology in your business
Avoiding get-rich-quick schemes that sound too good to be true
FROM THEORY TO EVERYDAY LIFE
In practice
Dot-com Bubble
In the late 1990s, many investors bought shares in companies with a '.com' suffix, expecting the internet’s growth to bring high returns. Many startups had untested business models and no profits, but share prices soared on the promise of future growth. When results failed to materialize, the bubble burst, wiping out vast wealth and demonstrating the danger of investing on hype rather than solid financial data.
Cryptocurrency ICO Craze
During the 2017 Initial Coin Offering boom, projects sought funding on the strength of whitepapers and promises about blockchain technology. The model asks investors to distinguish an appealing account of a technology’s potential from evidence that a particular project could work. A whitepaper alone does not resolve questions about the team, technology, or business viability.
A MOMENT TO REFLECT
Put it to work.
When have you invested time or money into something because of a compelling story rather than solid evidence? What were the results?
How can you distinguish between genuine innovation and hype that could lead to a bubble?
What specific metrics or data would you require before committing resources to a new venture?
CONTINUE THE CONVERSATION
Source texts
- The Great Mental Models Volume 4 Economics and Art