Thursday, May 17, 2012

Behavioural Economics and the Facebook IPO

Facebook, the social network, has raised $16bn in an initial public offering that values the company at $104bn, meaning it is now among the 25 most valuable public groups in the United States. This recent article by John Wasik (Reuters Money) discusses whether or not it is a good idea to get a piece of the action. Daniel Kahneman declined to comment specifically on Facebook, but raised the importance of a number of behavioural biases: overconfidence, optimism-bias and anchoring; to name a few. Liam has blogged before on behavioural finance, and I flagged the work of James Montier in a comment on that post. Avanidhar Subrahmanyam's review of the behavioural finance literature is available here, free-to-access.


Michael Dowling DCU said...

Interesting post.

Think Jay Ritter misrepresented his own research in that Reuters article! The idea about medium-term IPO underperformance is more-or-less confined to small cap companies. Idea being that they get excess media attention around IPO time and are then forgotten about for a few years until they've grown to a decent size and are considered media-worthy again. The medium term underperformance issue he mentions wouldn't affect a large company IPO like Facebook.

The thing is - this is Ritter's big idea and yet he seems to have forgotten about it when commenting for that article!

Martin Ryan said...

Thanks for the extra information there Michael; interesting stuff.

Kevin Denny said...

There is a good TED talk on optimism bias by Tali Sharot