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Investors tend to get overexcited when new forms of technology emerge...

In this video you'll learn:

  • how the 'new era thinking' has evolved;
  • what a declining price curve has to do with the tech boom; and 
  • how diversifying across all stocks is a better policy.

 

Transcript

Robin Powell: Every now and again, investors get excited by a new technological innovation, which appears to be ground-breaking. Driverless cars are a good example today. Economists sometimes refer to this as “new era thinking”.

David Chambers: The concept of new-era thinking has been associated with Robert Shiller, the Nobel prize winner. It was Shiller who really first coined this phrase. And, it refers to the tendency of investors to get overexcited about new forms of technology when they roll along. And, so, this would have been true for railroads in the mid-19th century, it would have been true of electricity and the internal combustion engine in the 1920th and then later on, at the end of the 20th century, it was true for computer technology and Internet-related technologies.

Robin Powell: When we think about internet stocks, it’s usually the likes of Amazon and eBay that come to mind. But successful firms like those have been vastly outnumbered by firms that flopped.

David Chambers: So, the other belief of these new-era thinking types of investors is, that they can pick the winners. Well, maybe you're incredibly talented or maybe you're incredibly lucky and you can. But, probably, what is closer to the truth is, that as a group these investors, tend not to pick the winners, or, they might pick them but they also pick an awful lot of losers. There is certainly a huge payoff in terms of the benefits that these technologies can bring. But, it was William Nordhaus, the famous Yale economist, whose research has shown this to be true in the case of electricity and also with computing. These huge payoffs we get in terms of productivity accrue to the economy as a whole. And, in particular, the vast majority of those gains accrue to the users of the technology and only a sliver of the benefits actually remain with the investors.

Robin Powell: So, why should it be consumers rather than investors who primarily benefit from these sorts of innovations? Well, the main problem is that whenever an important technology emerges in a particular sector, there’s a large influx of new entrants.

David Chambers: You get a lot of investment partly by money that’s raised during the bubble on the stock market and that new capacity drives prices down. And, so, the firms, therefore, are facing this steeply declining price curve and the gains that these firms were forecasting during the tech boom and that investors thought that they would be able to hold on to, turned out not to be the case usually.

Robin Powell: Innovations such as driverless cars are exciting. But, as an investor, you should keep your enthusiasm in check. A much better policy is to diversify across all stocks — and yes, that includes the boring ones.

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