A Psychoanalytic Interpretation of Dot.com Stock Valuations

Abstract:     
Financial economists are unable to provide plausible explanations for Internet stock valuations during the recent asset pricing bubble consistent with market rationality. Adopting a psychoanalytic perspective, this paper argues that investors became caught up emotionally with the drama leading to market prices departing in such an extreme way from fundamental value. Specifically, we propose a psychoanalytic theory of mental objects and show how this helps explain what actually took place during the different phases of dot.com mania. The paper concludes, more generally, that an understanding of how emotions determine psychic reality in stock valuations can usefully complement the contribution of conventional normative asset pricing models.

Keywords: Dot.com stocks, mania, valuation models, psychoanalysis, mental objects

JEL Classifications: G10, G12

Working Paper Series