If it acts like a bubble, and sounds like a bubble, when will we realize it’s a bubble?

Rita McGrath

When inflated beliefs about future value come into conflict with actual underlying value, conditions are right to create a bubble. Housing prices will always go up! Having a dot.com in your name will always increase value! If you can get to scale, you’ll win the digital battle! If you don’t invest in Crypto now, you’ll miss a once-in-a-lifetime opportunity! Let’s consider the evidence with respect to targeted Internet advertising.

In my book “Seeing Around Corners,” I make the point that inflection points, those events that change reality by a factor of 10, are often burbling along for ages, sometimes for decades. Then, when they pass a tipping point, the general reaction is “oh, this came completely out of the blue!” Take, for example, the COVID-19 pandemic.

EVIDENCE OF A BUBBLE

Investopedia tells us that a bubble “refers to a situation where the price for something— an individual stock, a financial asset, or even an entire sector, market, or asset class—exceeds its fundamental value by a large margin.” So, what is the evidence that the $740 billion advertisers are sinking into targeted digital ads may not be justified by the effectiveness of those ads?

Justin M. Rao, at the time with Microsoft Research came to an interesting conclusion with respect to deeply held, evidencefree beliefs by studying a group of people associated with the 2011 “End of the World” prediction. This was that on a specific day, all of humanity would ascend to heaven. He and his research team offered prizes to cult members of $5.00 “today” versus increasing amounts of money (up to $500) after the special date. He found that people who sincerely believed in the prophecy would gladly accept the funds today but wouldn’t take any amount of money offered after the special date.

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