Goldfarb kirsch bubbles and crashes; the boom and bust of technological innovation (2019)

Bubbles and Crashes This page intentionally left blank Bubbles and Crashes The Boom and Bust of Technological Innovation Brent Goldfarb and David A Kirsch Stanford University Press Stanford, California Stanford University Press Stanford, California © 2019 by the Board of Trustees of the Leland Stanford Junior University All rights reserved No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press Printed in the United States of America on acid-free, archival-quality paper Library of Congress Cataloging-in-Publication Data Names: Goldfarb, Brent, author | Kirsch, David A., author Title: Bubbles and crashes : the boom and bust of technological innovation / Brent Goldfarb and David A Kirsch Description: Stanford, California : Stanford University Press, 2019 | Includes bibliographical references and index Identifiers: LCCN 2018037966 (print) | LCCN 2018040063 (e-book) | ISBN 9781503607934 (e-book) | ISBN 9780804793834 (cloth : alk paper) Subjects: LCSH: Technological innovations—Economic aspects | Business cycles Classification: LCC HC79.T4 (e-book) | LCC HC79.T4 G645 2019 (print) | DDC 338/.064—dc23 LC record available at https://lccn.loc.gov/2018037966 Typeset by Newgen in 11.25/16 Baskerville Cover design: Rob Ehle Cover image: iStock | dkidpix Mom and Dad, thanks for always cheering me on throughout the many years Elena and Nathaniel, your brightness keeps me going Beth, nothing would be possible without your endless love, patience, and support 17 —BDG Jacob and Isabel, thank you for your company on this and so many journeys Andrea, I look forward to keeping you company when they have left the nest Dad, I miss you —DAK This page intentionally left blank Contents Acknowledgmentsix Introduction1 Bubbles and Non-Bubbles Across Time 23 Uncertainty and Narratives 48 Novices, Naïfs, and Biases 72 When Are There Not Bubbles? 103 Recent and Future Bubbles 131 Policy Implications 159 Appendix: Methods Used in Coding Technologies 177 Notes191 References221 Index 237 This page intentionally left blank Acknowledgments It pains us to write that this book took many years to complete It was always a big endeavor, one that grew bigger the deeper and longer we dug During this time, there has been a long parade of excellent and dedicated students who have assisted us with our research It would not have been possible to complete this project without early assistance of Pablo Slutzky, Heidi Nalley and Haley Nalley, Fardad Golshany, Jen Fortini, Ami Trivedi, Dana Haimovitz, Aayushi Shah, Dillon Fletcher, Pierre Souchet, Candice Ho, Mahum Hussain, Mary Nguyen, Solen Kebede, Nafeez Amin, Stanley Portillo, Liana Alvarez, Brian Zimmerman, Sanil Shah, and Devika Raj We also called upon several of our outstanding doctoral students Robert Vesco helped organize the digitization of the stock prices from the curb market; Liyue Yan and Sandeep Pillai were instrumental at critical moments, oftentimes putting aside their own work to finish this task or the other Without complaint! The care these students put into this project helped make it a reality Our local administrative team kept us organized: thank you, Barbara Chipman, Tina Marie Rollason, Kristine Maenpaa, and Mary Crowe We received constructive comments from seminar participants at multiple universities, including the University of Wisconsin, the Wharton School at the University of Pennsylvania, Tsinghua University, Hong Kong Polytechnic, UCLA, UC Berkeley, Rutgers, the University of Toronto, London Business School, Ivey Business School, New York University, Universidad de los Andes in Buenos Aires, Boston University, and the University of Chicago Avi Goldfarb (no relation), Dan Gordon, Jerry Hoberg, Sarah Kaplan, David Kressler, 234  References Sokolove, Michael 2002 “How to Lose $850 Million—and Not Really Care.” New York Times, June Staudenmaier, John M 2002 “Rationality, Agency, Contingency: Recent Trends in the History of Technology.” Reviews in American History 30 (1): 168–81 Stehman, Jonas Warren 1925 The Financial History of the American Telephone and Telegraph Company Boston: Houghton Mifflin Stillson, Richard T 1971 “The Financing of Malayan Rubber, 1905–1923.” Economic History Review 24 (4): 589–98 ——— 2006 Spreading the Word: A History of Information in the California Gold Rush Lincoln: University of Nebraska Press “Stock Spree: Many Investors By-Pass ‘Blue Chips,’ Bid Up Lesser Known Shares.” 1961 Wall Street Journal, April 24 Thompson, Earl A 2007 “The Tulipmania: Fact or Artifact?” Public Choice 130: 99–114 “Topics on Wall Street.” 1916 New York Times, August 27 http://​search​.proquest​ com/​docview/​97866489 Tripsas, Mary 1997a “Surviving Radical Technological Change Through Dynamic Capability: Evidence from the Typesetter Industry.” Industrial & Corporate Change (2): 341–77 ——— 1997b “Unraveling the Process of Creative Destruction: Complementary Assets and Incumbent Survival in the Typesetter Industry.” Strategic Management Journal 18: 119–42 Trueman, Brett M., M H Franco Wong, and Xiao-Jun Zhang 2000 “The Eyeballs Have It: Searching for the Value in Internet Stocks.” Journal of Accounting Research 38: 137–62 Tushman, Michael L., and Philip Anderson 1986 “Technological Discontinuities and Organizational Environments.” Administrative Science Quarterly 31 (3): 439–65 Tversky, Amos, and Daniel Kahneman 1971 “Belief in the Law of Small Numbers.” Psychological Bulletin 76 (2): 105–10 ——— 1973 “Availability: A Heuristic for Judging Frequency and Probability.” Cognitive Psychology (2): 207–32 “Two Important Cures Announced: New Insulin Treatment Reported Used with Success in Case of Diabetic Coma.” 1922 New York Times December 6, 17 “U.S Business: German Engine Is in U.S via Japan.” 1970 New York Times, July 19 US Census Bureau 1990 Statistical Abstract of the United States, 1990 https://​www​ census​.gov/​prod/​99pubs/​99statab/​sec31​.pdf US Census Bureau N.d “U.S Census Bureau QuickFacts: United States.” https://​ www​.census​.gov/​quickfacts/​table/​PST045215/​00 Utterback, J., and W Abernathy 1975 “A Dynamic Model of Product and Process Innovation.” Omega 3: 638–56 References  235 Van Duijn, J J 1981 “Fluctuations in Innovations Overtime.” Futures 13 (4): 264–75 Vanek Smith, Stacy, and Robert Smith 2016 “Oil #1: We Buy Oil.” NPR Planet Money https://​www​.npr​.org/​sections/​money/​2016/​08/​10/​489457747/​oil​-1​ -we​-buy​-oil van Lente, Harro 2012 “Navigating Foresight in a Sea of Expectations: Lessons from the Sociology of Expectations.” Technology Analysis & Strategic Management 24 (8): 769–82 Vartan, Vartanig G 1972 “Market Dawdles at a Snail’s Pace.” New York Times, July 4 Wadell, Richard 1973 “The Wankel Comes of Age.” New York Times, April https://​www​.nytimes​.com/​1973/​04/​08/​archives/​the​-wankel​-comes​-of​-age​ -challenge​-conceded​-license​-agreement​-there​.html Warner, E P 1931 “Commercial Aviation—Illusion or Fact.” Yale Review 20 (June): 707 Wax, P M 1995 “Elixirs, Diluents, and the Passage of the 1938 Federal Food, Drug and Cosmetic Act.” Annals of Internal Medicine 122 (6): 456–61 “Young Industries Develop Rapidly: Airplanes, Rayon, Radio and Other Lines Make Broad Strides During Past Year.” 1928 Wall Street Journal, December 31 “Young Roosevelt Saved by New Drug.” 1936 New York Times, December 17 Zeckhauser, R 2006 “Investing in the Unknown and Unknowable.” Capitalism and Society (2): Zott, C., and R Amit 2007 “Business Model Design and the Performance of Entrepreneurial Firms.” Organization Science 18 (2): 181–99 http://​pubsonline​ informs​.org/​doi/​abs/​10​.1287/​orsc​.1060​.0232 This page intentionally left blank Index Page numbers in italics indicate material in figures and tables Akron, Ohio, 59–60 Allen, Frederick M., 29 Allison Engineering, 117 alternative energy bubble, 131 Amazon, 2, 3, 74, 191n7 American Bell Telephone Company, 28 American Cyanamid, 111, 210n9 American Economics Association, 50 American Stock Exchange (AMEX), 32–33 American Telephone and Telegraph (AT&T), 13, 62, 95 America Online (AOL), 135 analogies, 25–26, 72–75 angel investors, 18–19, 172 Anglo-American Brush Company (AABC), 19 antibiotics See penicillin; sulfa drugs (sulfanilamide) Apple II, 143–44 assembly line, 45 asset classes, 6–8, 14, 25, 39, 194– 95n40, 205n13 attention focus, 14–15, 73, 75, 77, 79–80, 112, 117–20, 137–38, 165, 173, 196n47, 204nn6, 8, 205n11 Austin, Texas, 48 automatic watch, 104–6 automobile, 44–45, 104; autonomous vehicles, 174; demand uncertainty, 67–69; electric vehicles, 156–58, 208n46; internal combustion engine, 67–68; stocks, 36–37, 37; Wankel (rotary) engine, 119–23 See also rubber and tire industry aviation, 15, 54, 160; adjacent sectors, 117; airmail, 57, 58–59, 116–17; bubble narrative, 114–15; commercial, 116–18; frothiness, 117–18; government subsidies, 57–59; jet engine, 59, 104, 114–15; passenger transportation, 59; warnings to investors, 57–58 Banting, Frederick, 29–30 Barber, Brad, 75, 215n8 Barnes & Noble, 74 Bayer laboratories, 109 Beanie Babies, 23, 25 bear markets, 17, 79, 82, 154, 162, 170 beliefs, 19; about future profits, 24, 196–97n2; coordination or alignment through narratives, 14–15, 77, 165, 174–75; pure plays and, 15, 55 Bell, Alexander Graham, 13, 27, 62, 95 238  Index Bell Telephone companies, 13, 27–28, 38, 62, 122–23, 164 bets, 2, 6, 12, 24–25, 33, 50, 52, 70, 118, 144, 163; automobile, 67–68; aviation, 104; biases, 72–73; Wankel engine, 121, 123 See also bids better battery bugaboo, 156 Beunza, Daniel, 74 biases, 72–73, 198n24, 204n6 bids, 52–55, 61–62, 66, 69–70, 82, 118 See also bets Big Board, 91, 96 Black Monday (October 28, 1929), 159 Blodget, Henry, 74 blue chip stocks, 115 blue-sky laws, 94 Boeing, 114–15 bonds, 88–89, 95 boom and bust episodes, 4, 9–10, 24; aviation, 114–15; comparing across technologies, 9, 34–37; rubberrelated assets, 44 See also bubbles Boston Stock Exchange, 28 Brazil, rubber monopoly, 54, 59 Britain, rubber industry, 43–44, 59–60 British electrical companies, 19–21 British South Sea Bubble, 38 broadcasts, 12, 16, 31–33, 46, 52, 64–67 See also radio brokerage houses, 4, 94, 95–96, 135–36 Brush, Charles F., 17, 196n47 Brush Electric Company, 17–21, 195–96n47 bubbles, 213n57; aviation, 116–17; bubble-free times, 31, 38–47, 106, 108, 112, 148, 218n57; counterfactuals, 6, 128–30; definitions, 2, 9, 23–26, 168; as deviation from fundamental value, 24; diversification, effect on, 41, 100, 107, 112–13; dot-com, 2, 38, 162; electric company assets, 1882, 19; “flash crashes,” 197n3; future, 152–58; housing crisis, 21, 152–55, 155, 166; inefficiency, 4; internet, late 1990s, 131, 134–42; lack of data, 8–9; narratives and, 3; pure plays and, 13–14; “rational,” 196–97n2; transistor, 123–25; uncertainty and, 11–13, 19; Wankel engine, 118–23; in Wharton 30 technologies, 132; window of opportunity, 41–42, 44, 46, 53, 137–40, 213–14n58 See also boom and bust episodes; novice investors “bucket shops,” 91, 208n40 Buick, 45 business cycle, 40 business models, 11, 167; assessing, 164; automobile, 67; housing, 153; internet, 135, 139–40, 192n17; PC industry, 145; policy implications, 174; radio, 46, 64–66; telegraph, 46; telephone, 27–28, 62; television, 127; Tesla, 156; uncertainty, 41, 64–67, 70, 145, 174, 194n35 California gold rush, 15, 76–77, 164–65 Camerer, Colin, 173 capitalism: boom and bust cycles, 25; citizens’, 96; entrepreneurial, 3–4, 49; venture capitalists, 4–5, 136, 138, 150, 166, 168 See also venture capitalists Index  239 capital markets, trading changes, 89–90 Casson, Herbert N., 26 causal factors, 10–11, 21–22, 25, 39 Charles Schwab, 101, 135 Chrysler, Walter, 156 Chrysler Corporation, 120 Cleveland Stock Exchange (CSE), 18 Cohen, Jonathan, 74 Cold War, 114, 115 Collip, J B., 29–30 Commercial Telegraph Company, 90 Commodore International, 144 Compaq, 144 competition, 167; PC industry, 144–45; policy implications, 162–63, 173– 74 competitive uncertainty, 59–64, 70, 144–45 concreteness, 161 Consolidated Exchange, 84, 196n49 consumer facing technologies, 96, 104, 121, 148, 150, 158; LCDs, 146; PC industry, 139–40, 143, 145; transistor radio, 124; use, 161–62, 167 coordinating events, 77, 195n41 See also beliefs Corning, 140, 141 corporations: general incorporation, 87–89, 97, 207n27; individual share ownership, 1927 to 1930, 97–98 cortisone, 128–29 counterfactuals, 6, 128–30 counternarratives, 172 Cowles industrial index (pre-1926), 41, 198n23 credibility, 161, 164–65 credit-rating agencies, 153–54 crowdfunding, 16, 172 Curtiss-Wright, 116, 119–22 DC-3, 118 DDT, 43 de Forest, Lee, 46, 64 Delaware, general incorporation laws, 89 Dell Computers, 74 democratization of investment See market democratization Detroit Stock Exchange, 45 diabetes See insulin disclosure, 172 disclosure requirements, 95 diversification, effect on bubbles, 41, 100, 107, 112–13, 127 dividends, 89, 124 Domagk, Gerhard, 109, 110 dot-com bubble, 1–2, 5, 38, 162, 169 Douglas, Susan, 31–32, 52 Douglas Aircraft, 114, 118 Dow Jones Industrial Average, 3, 90, 92, 93; Black Monday, 159 Drake, Edwin, 128 DuPont, 112–13 du Pont, Ethel, 109 eBay transactions, 23 e-commerce, 1–2 economics, narratives and, 50 Edison, Thomas, 90 education, 170–72 efficient markets, 24, 193n25 Eisenhower, Dwight, 114 Electra-Autolite, 107 electric light See lighting, electric Electric Light Act of 1885, Britain, 20–21 Electric Vehicle Company (EVC), 67 240  Index electric vehicles, 156–58, 208n46 Eli Lilly and Company, 30–31, 38, 45, 111 entrepreneurial capitalism, 3–4, 49 entrepreneurship, 5, 171–72 entry, excess, 173, 202n36 entry costs, 147, 163 environmental regulation, 120 equity investors, 172 equity networks, 18–19 eToys.com, 1–3, 5, 10, 14, 137 E*Trade, 4, 16, 162 expectations, sociology of, 51–52 external validity, 132–33 Extraordinary Popular Delusions and the Madness of Crowds (MacKay), 15 “eyeballs” (website traffic), 1–2, 5, 138 fads and fashions, 14, 73 false positives, 142, 146, 148, 151, 155 familiarity, 5, 16, 53, 72, 79–80, 167 Fessenden, Reginald, 46, 64 fiber optics, 134, 139, 140–41 financial literacy, 170–72 Firestone, H S., 61 Firestone Tire and Rubber Company, 61 Fisher, Irving, 79, 159–60, 174 “flash crashes,” 197n3 Flivver, 116, 117 Flyer (plane), 57 Fokker, 116, 117 Food, Drug, and Cosmetic Act of 1938, 110, 111 foolish investors, 24–25, 76, 124, 197n2 Ford, Edsel, 116 Ford, Henry, 116, 117 Ford Motor Company, 36–37, 120; Model T, 45, 116 FPDs (flat-panel displays), 147 fraudsters, 31, 75, 175 free entry, 163 frothiness, 35–37, 36, 52, 127, 198n21; aerospace and defense index, 115; aviation, 117–18; comparisons, 38; internet and, 139–40; late 1920s, 98; venture capitalists and risk, 168; Wankel engine, 121, 123 fundamental value, 9, 24 future bubbles, 152–58, 161 future profits, 24, 196–97n2 gaming, 143 Garud, Raghu, 74 Gaul, Albro T., 106–8 General Electric, 46 general incorporation, 87–89, 97 General Incorporation Act of 1811, 88, 207n27 generally accepted accounting practices (GAAP), 93, 157 General Motors, 36–37, 117, 120–22 general purpose technologies, 123, 198–99n25 “get big fast” narrative, 2–3, 5, 136–38 Glass-Steagall Act, 214n58 Global Crossing, 140 Goodyear, Charles, 43, 44, 87, 88, 89 government subsidies, 57, 58–59 Great Depression, 4, 17, 34, 37, 79, 86, 100, 111, 132, 152, 168–69; “value” narrative and, 125 “greater fool theory,” 76, 124, 197n2 Great Recession, 2008, 21, 169 Greenspan, Alan, 174 growth stocks, 93 Guggenheim, Daniel, 57, 59 Guzman, Jorge, 168 Hambrecht, William, 145 Harwood, John, 105–6 Index  241 hearing aids, 123, 124 Heath, Chip, 74, 75, 110, 161 Heath, Dan, 74, 110, 161 Heinicke Instruments, 120 herding, theories of, 14, 73 Higonnet, René, 106–7 Higonnet-Moyroud photographic typecomposing machine, 106–8 Hindenburg disaster, 9, 15 historical contexts, 8, 134, 152 Hochfelder, David, 90–91 Holmes, Oliver Wendell, 208n40 Hoover, Herbert H., 65 Hounshell, David, 113 household stock ownership, 83, 94, 145, 209n62, 214n6 housing crisis, 21, 152–55, 155, 166 hovercraft, 54–55 Hughes, Antoinette, 29–30 Hughes, Charles, 29 Hughes, Elizabeth, 29–30 human psychology, 25 Hutton, E F., 114 IBM, 124, 144 IBM PC, 143 imagined futures, 3, 50–56, 70, 113, 116, 119, 123 incandescent lamp, 127 See also lighting, electric incomplete information, 80 indexes, 41–42, 184–90; aerospace and defense, 115; air transport, 59; automobile, 36–37, 37; aviation, 118; dot-com, 3–4; factors in model, 125–26, 126, 151, 151–52; frothiness and, 35–38, 36, 37, 41; long-term average value, 35; missile, 114; radio stocks, 33, 38; realized price, 35; rubber market, 60; steel-sector, 128; telephone stocks, 28; television stocks, 33–34; tire and rubber, 35–37, 36, 37 industrial conglomerates, 147, 157 industrials/industrial stocks, 92–93 inevitability, 1, 5, 17, 52, 58–60, 66, 69, 122–23, 149, 160, 162, 164, 169, 173; policy requirements and, 169 inference, errors of, 39, 132 information asymmetry, 195n43 information diet, 165 information technology revolution, 42, 87 infrastructure, 2, 31, 116, 168; internet, 131, 134, 137 initial public offering (IPO), 169; Apple, 144; aviation, 15, 57; electric vehicles, 156, 157; internet, 15, 137–39 innovations, 168 insider trading, 96, 195n43 insulin, 29–31, 38, 52, 53, 111, 150, 197n13 Intel, 144 intellectual property protection, 13, 104, 122, 140 interdependency, 43–44, 198n25 intermarket variation, 9, 38, 192–93n19 intermediaries, 166, 167, 215n8, 218n50 internal combustion engine, 44–45, 67–68, 118–19; Wankel engine, 118–23, 212n42 internet, 1, 21, 192n17; bubble, late 1990s, 131, 134–42; business models, 135, 139–40, 192n17; ecommerce, holiday season, 138–39; fiber optics, 134, 139, 140–41; initial public offering (IPO) window, 137–39; media file compression and open-source 242  Index internet (continued ) software, 134, 139, 141–42; online trading, 135–36, 215n8 See also PC industry Intertype, 107 investment retirement accounts, 170 investment targets, 41, 55, 76, 79, 120, 161 investors: angels, 18–19, 172; e-commerce and, 1–2; equity, 172; financially literate, 72, 73; foolish, 24–25, 76, 124, 197n2; inexperienced, 4–5, 10, 153–54; noise traders, 15, 81–82, 102; professional, 4, 15; pure plays and, 55; retail, 4; sophisticated, 81–82; warnings to, 57–58 See also novice investors iPhone, 112 Isramco (ISRL), 73, 74–76, 77–78 jet engine, 59, 104, 114–15 Jobs, Steve, 216–17n33 Johnson, Clay, 165 Jumpstart Our Business Startups Act, 16 Kahneman, Daniel, 53, 80, 204n6 Kindleberger, Charles, 198n24 known unknowns, 80, 195n40 Kondratiev, Nikolai, 39–40, 105 Kranzberg, Mel, 168 lab experiments, 82, 194n34 Lamoreaux, Naomi, 18 land grab narrative, 2, 5, 137 laparoscopic surgery, 21, 148–52, 217n44 lenders, 81, 98–99, 152, 166 Lenk, Toby, 1–3, 14, 137 Levenstein, Margaret, 18 leverage, 75, 96, 98, 117, 161, 165–67, 169–70 Liberty bonds, 96 lighting, electric, 12, 17–21, 48–49, 53, 161, 195–96n47 limited liability investments, 50, 200n2 Lindbergh, Charles, flight of, 15, 54, 57, 115, 116, 117–18, 160 Linde company, 18, 196n47 Linux operating system, 141–42 liquid crystal displays (LCDs), 21, 146–48, 173, 217n43 liquidity, 20 lithium-ion battery cells, 157 Lithomat Corporation, 107 London Stock Exchange (LSE), 20, 44, 60 long cycle/long wave theory, 40, 43, 105 Lovallo, Dan, 173 Lumitype Photon, 107 luxury goods, 105 Lyft, 163 Macintosh, 216–17n33 MacKay, Charles, 15 Mackenzie, Donald, 54 Macleod, J J R., 29–30 macroeconomic processes, 35, 82, 144, 198n25 major technological innovations, as category, 7–8, 40–43 Malay rubber plantations, 59–61 March, James, 56 Marconi, Guglielmo, 46, 64 Marconi Company, 46, 64 margin, buying on, 98–100, 99, 135, 162, 175 market democratization, 16–17, 83–102, 122–23; 1900–1929, 94–100; 1930–1980, 100–102; Index  243 individual share ownership, 1927 to 1930, 97–98; nineteenth century, 87–94; telephone and, 95; work needed to purchase share, 83–87, 85, 86 market institutions, markets, fundamental characteristics of, 25 market speculation, 7, 14, 22, 30–31, 39–42, 51, 62, 114, 167, 173; 1920s, 92, 99–100, 160; familiarity with concept and, 16; investment targets, 41; leverage and, 169–70; PCs, 143; television, 33 mass production, 44–45 McCoy, John, 81 Means, Gardiner, 93–94, 97 meatpacking industry, 44, 45 media, 55, 138, 200n1; beliefs and, 14; bias and, 204n6; celebrities, 149– 50; internet reporting, 138, 143; narrative accelerators and, 3, 161, 164–65, 167, 174–75; newspapers, 9, 28, 44, 97, 119, 121, 161, 174; sticky ideas and, 76, 78, 199n30; sulfa drug reports, 110, 111 medical device industry, 150 mental models of trading behavior, 159 mentoring, 172 Mercedes, 119–20 Merck, 128, 210n9 Mergenthaler, 106–8 Merrill Lynch, 4, 94, 96, 100, 162, 219n3 metaknowledge, 81 metering technology, 12 methods used in coding technologies, 177–90 Metropolitan Opera, 16 Microsoft, 140, 144 military applications, 114, 124, 195n41 Miller, David, 5, 21 missile index, 114 Model T Ford, 45, 116 monopoly rights, 19, 62–63 Monumental Park (Public Square), Cleveland, 17–21 Moore’s law, 124, 147 moral hazard problem, 166 mortgage-backed securities, 152–55, 218n50 Mosaic browser, 138 movable type, 104, 106–8, 209n2 Moyroud, Louis, 107 Musk, Elon, 51–52, 156 mutual funds, 100, 115 naïfs See novice investors Nanda, Ramana, 168 narrative accelerators, 3, 161, 164–65, 167, 174–75 See also Lindbergh, Charles, flight of narrative economics, 50 narratives, 22, 48–49, 200–201n7; absence of, 105–6; accessibility of, 53–54; analogies, 25–26; arc of, 14–15; aviation, 114–15, 116–17; competing, 12, 51–53, 164; coordination or alignment of beliefs through, 14–15, 77, 164, 174–75; cross-referencing stock movements with, 42; defined, 51; electric vehicle, 156–57; entrepreneurial capitalism built on, 3–4; false, 53; “get big fast,” 2–3, 5, 136–38; housing, 153; inevitability, 1, 5, 17, 52, 58–60, 66, 69, 122–23, 149, 160, 162, 164, 173; land grab, 2, 5, 137; multiple, 52–53; opportunity, uncertainty as, 58; past and, 53, 73, 153; radio, 32; shared, 160; 244  Index narratives (continued ) social movement, 157; start-ups, 41, 50–51, 93, 113–14; sticky ideas, 55, 74–77, 108, 117–18, 129, 161, 167; understanding and, 53–54, 57–58, 121; unknowability and, 5–6; upper bounds, 56; “value,” 124–25; Wankel engine, 121 See also business models; competition; media; pure plays; uncertainty; value chains NASDAQ Composite Index, 2, 4, 138–39, 144 National Bell Telephone Company, 27, 62 National Carbon, 18 Netscape, 3, 15, 137–38 New England Bell Telephone Company, 28 newness, 73, 93 New York Curb Market, 32–33, 46, 91, 93–95, 116, 196n49, 206–7n26, 208n48 New York State Legislature, 88 New York Stock Exchange (NYSE), 20, 84, 88; brokerage houses, 95–96; marketing campaign, 94; minimum trades, 84, 91; radio stock, 23; stock tickers, 90 New York Times, 109, 110, 123, 138, 148, 149; University of Texas and oil boom, 167–68 Nocera, Joe, 96 noise traders, 15, 81–82, 102 Norbye, Jan, 119, 121 novice investors, 15–18, 72–83, 194–95n40, 205n13; assessing, 162; aviation and, 115; financial professionals, 136; housing bubble and, 153–54; influence of, 81–82; margin loans, 98–100, 99; predatory practices and, 96–97; Wankel engine and, 121 See also investors NSU, 119, 122 nylon, 104, 112–13, 127 O’Connor, Ellen, 50–51 Odean, Terrance, 75, 215n8 oil boom, 1920s, 167–68 oil speculation, 42, 128 Olds, Ransom E., 67 Olds Motor Vehicle Company, 67–68 opportunity, uncertainty as, 58–59 option effect, 10, 50, 56, 193n32 Orteig Prize, 57 O’Sullivan, Mary, 46, 88, 93, 97 over-the-counter (OTC) trades, 89–91 Packard, 117 pancreatic factor, 29–30 Panic of 1893, 93 Panic of 1897, 94 patents, 30–31, 32, 65, 87, 198n18; radio, 46; sulfa drugs, 109–10; telephone, 62–63; Wankel engine, 122 PC industry, 134, 139, 143–46, 216n28; competition, 144–45 See also internet penicillin, 42, 109, 112 Pennsylvania oil speculation, 42, 128 performative effects, 51 Pfarrer, Michael, Photon, 107 policy implications, 159–75; bubbles neither good nor bad, nor neutral, 167–70; business model, 164, 174; education, 170–72; leverage, 165–66; naïfs, 162; narrative accelerator, 161, 164–65, 167, 174–75; pure plays and Index  245 competition, 162–63, 173–74; story, 161, 170; use, 161–62 Polk, James K., 15, 76–77, 164–65 Pratt, Sereno, 93 predatory practices, 96–97 Prelec, Dražen, 81 pricing power, 2, 163 printing machines, 106–8, 209n2 private companies, 30–31, 37, 38, 41, 42; automatic watch, 106; Ford, 45; sulfa drugs and, 111 professional investors, 4, 15 profitability, 125 Prontosil, 109 pure plays, 13–14, 33, 55, 108, 111– 14, 126–27, 129–30, 167; assessing, 162–63; aviation, 118; internal combustion engine, 44–45; jet engine, 114–15; laparoscopy, 150; policy implications, 173–74; sulfa drugs, 111–12; Wharton 30 list and, 131–33 reasonable assessments, 9–10 recession of 1890–1893, 93 regional exchanges, 46, 97 regulation, 8, 16; 1910s, 96–97; 1930s, 100; crowdfunding, 170; restricting percentage of assets risked, 172, 175; securities, 96, 173; uncer­ tainty, 65, 70, 178 retail-facing innovations, 16 retail investors, Rhodes-Kropf, Matthew, 168 risk, base rate, 172, 174 Rockefeller, J D., 95 Roosevelt, Eleanor, 109 Roosevelt, Franklin Delano, 108–9 Roosevelt, Franklin Delano, Jr., 108–9 rubber and tire industry, 35–37, 36, 37, 59–60, 63–64, 69, 111, 141, 202n29 See also automobile rubber trees, 43–44, 59 Rumsfeld, Donald, 80 Russell, Bertrand, 80–81 quadruplex, 90–91 Qwest Communications, 140 sampling strategies, 38–39, 43 Sarnoff, David, 32, 65, 79 SBICs (small-business investment corporations), 213n55 Schonfeld, Erick, scientific apophenia, 132 scientific method, 7, 38 Second Industrial Revolution, 85, 195–96n47 Securities and Exchange Commission (SEC), 100, 169, 214n58 securities regulations, 96, 173 self-fulfilling prophecy, 51, 54, 165 self-reinforcement, 76 S E Massengill, 110 semiconductors, 125 Seung, Sebastian, 81 Shanghai exchange, 44, 61 radio, 12, 16, 23, 160; 1898–1933, 31–33; 1929 investments, 33; broadcasting, 12, 16, 31–33, 46, 52, 64–67, 78, 80; business model, 64–66, 79; frothiness of stocks, 52; transistor, 123–25; window of bubble opportunity, 46, 199n34 Radio Corporation of America (RCA), 12, 23, 32–33, 46, 65–66, 79, 127 railroad bonds and stocks, 88, 92, 207nn28, 32 “Railway Mania” bubble, rational decision maker, 22, 24, 196–97n2 realized price index, 35 246  Index Shiller, Robert, 22, 50, 174, 204n8 short selling/shorting, 81, 194n39 similar ventures, 25–26 simile and metaphor, 74 simplicity, 161 Smith, John, 113 Smith, Vernon, 82 Sobel, Robert, 211n21 Sokoloff, Kenneth, 18 sophisticated investors, 81–82 stakeholders, 51, 53–55, 160 Stalin, Joseph, 39–40 Standard Oil, 95 Standard & Poor’s 500, 3, 41 start-ups, 41, 50–51, 93, 113–14 steam engine, 92 steelmaking, oxygen process, 127–28 Stehman, Jonas Warren, 27, 197n7 Stern, Scott, 168 sticky ideas, 55, 74–77, 108, 129, 161, 167; aviation, 117–18 Stine, Charles, 112 Stockly, George, 17, 196n47 stock market crash: of 1929, 34, 79, 86, 159; of 1987, 136 stocks: blue chip, 115; growth, 93; industrials, 92–93 See also specific stocks stock splits, 78 stock ticker, 90, 95, 207n33 Stout Aircraft, 116 subscribers, 18–19 SUCCESS acronym, 161–62 sulfa drugs (sulfanilamide), 42, 104, 108–14, 210–11n13, 210nn9, 12 supply-side innovations, 16 Supreme Court, 62 Tandy, 143, 144 technological uncertainty, 57–59, 70, 114–15, 123–24, 129, 148 technologies: comparing boom and bust episodes across, 9, 34–37; consumer facing, 96, 104, 121, 124, 139, 143, 145–46, 148, 150, 158; effect on investment behavior, 82–83, 89–96; general purpose, 123, 198–99n25; interdependent, 43–44, 198n25; list of 58, 179–81; major technological innovations, as category, 7–8, 40–43; Original 58, 131–34; timelines of, 40; Wharton 30 list, 131–34, 139, 148, 182–83 See also insulin; internet; PC industry; radio; telephone; television telegraph, 27, 46, 90, 207n32 telephone, 13, 26–29, 38; as almost bubble, 61–62; market democratization and, 28, 95; uncertainty and narrative, 61–63 television, 16, 23, 127; 1926–1951, 33–34; color, 41–42 Tesla Inc., 51–52, 93, 156–58, 162–63 three-dimensional printing, 55–56 Toys “R” Us, 1, 191n1 trading changes from 1860 to 1890, 89–94 transistor, 123–25, 130 trend, 35–37, 36, 198n22 “‘tronics” boom, 1960s, 4, 124 Tulipmania, 1637, 23, 38, 196n1 Tversky, Amos, 204n6 Uber, 163 uncertainty, 11–13; aviation and, 118; beliefs and, 14–15, 19; business model, 41, 64–67, 70, 145, 174, 194n35; competing narratives, 52–53, 55–56; competitive, 59–64, 70, 144–45; demand, 67–69, 139, 178; electric vehicle, 156–58; Index  247 imagined futures, 3, 50–56; intellectual property protection and, 13; internet technologies, 135; known unknowns, 80, 195n40; media and, 55; as opportunity, 58–59; option effect, 10, 50, 56; pure plays and, 13–14; regulatory, 65, 70, 178; resolution of, 11, 17, 28–29, 44, 48–49, 53, 55, 62–65, 139–40, 178, 194n35; self-fulfilling prophecy, 51, 54; sulfa drugs and, 110; technological, 57–59, 70, 114–15, 123–24, 129, 148; trough of, 54; two dimensions of, 177–78; types, 49, 70; understanding and, 53–54, 57–58; unknowability, 5–6, 8, 194–95n40; unknown unknowns, 80, 195n40; value chains, 65–67, 70, 80, 129, 145 See also narratives universities, 64–65 University of Texas, 167–68 University of Toronto, 30 unknowability, 5–6, 8, 194–95n40 unknown unknowns, 80, 195n40 US Food and Drug Administration, 110, 178 vacuum-tube firms, 124 Vail, Theodore, 28 value, appropriation of, 5, 11–13, 15, 56 value chain, 11–12, 65–67, 80, 104, 129, 178; autonomous vehicles, 174; PC industry, 145 “value” narrative, 124–25 van Lente, Harro, 54 vaporware, 116 venture accelerators, 172 venture capitalists, 4–5, 136, 138, 150, 166, 168 vertical integration, 122 VisiCalc, 143 volatility, 25–26, 49; telephone industry, 28–29 See also uncertainty vulnerable individuals, 16, 165, 169, 175 wage controls, 86 wages, rising, 92, 101 Walker Manufacturing Company, 18 Wankel (rotary) engine, 118–23, 212n42 Weber, Larry, 146 Western Union, 27–28, 62, 90 Westinghouse, 46 Wharton 30 list, 131–34, 139, 148, 182–83 Whitney, William H., 67 Wickham, Sir Henry, 54, 59, 60 window of bubble opportunity, 41–42, 44, 46, 101, 213–14n58; internet, 137–40; length of, 53; narratives and, 53 Wonderful World of Insects (Gaul), 106–8 World War I, 57, 198n18 World War II, 59, 110, 169 Wright Aeronautical, 116–17 Wright brothers, 57 Yahoo!, .. .Bubbles and Crashes This page intentionally left blank Bubbles and Crashes The Boom and Bust of Technological Innovation Brent Goldfarb and David A Kirsch Stanford University... profit, even before the precise mode of profit is known Uncertainty is necessary for the existence of a boom and bust episode Without it there are no surprises, and hence neither booms nor busts.34... Library of Congress Cataloging-in-Publication Data Names: Goldfarb, Brent, author | Kirsch, David A., author Title: Bubbles and crashes : the boom and bust of technological innovation / Brent Goldfarb