When prices are surging and everyone is getting wealthier, criticizing a bubble can become a kind of weaponized FOMO: the simplest way to live with other people’s gains is to decide they’re being briefly compensated for foolishness. On the way down, bubbles produce even more talk; the skeptics look right, and many participants have time on their hands to explain their version of events. It’s no accident that some of the most exhaustive business books center on collapses rather than triumphs. Former employees of Enron, Theranos, Long-Term Capital Management, and Countrywide Financial had far more time to speak with authors when they were no longer occupied at work, and they also had a stronger reason to do it.
But even though “bubble” is usually used as an insult, the right sort of bubble, at the right moment, can have a powerful beneficial impact on the world. A bubble is an objectively irrational shared faith in a better possible future … but that doesn’t merely describe someone driving up asset prices; it also describes anyone who decides to create that kind of future. (And it’s no accident that the other social meaning of “bubble” is a filter bubble — a fact- and criticism-proof wall that leaves a group of people convinced, despite all outside evidence, that they are correct.)
The first major smartphone bubble didn’t appear in share prices; it was Apple’s belief that a fully featured, touch-based, internet-connected device could be placed in the hands of millions of customers for a few hundred dollars. When Apple began developing the iPhone, that belief was not yet fully backed by the facts. The earliest demonstrations of the touch interface, for instance, were astonishingly awkward (The One Device recounts an early internal demo of “a table-sized contraption with a projector pointed at a white piece of paper,” an uninspiring start for something meant to fit in a pocket), but it was quickly improved into something that functioned as intended.
The less plausible it is to deliver a particular mix of useful product features, the more remarkable the outcome will be. So one part of the job of any organization pursuing deep research and/or development is to keep the team persuaded, despite everything, that their effort is not pointless. This offers another way to view Apple’s famous secrecy: It wasn’t only that they wanted the launch to feel important, but that they didn’t want the iPhone team to receive candid, informed reactions from people who thought it could not be done. It also helps explain the long hours these projects demand; the payoff is not only the labor itself, but the lack of off-the-job feedback.
If we’re the average of the five people we spend the most time with, then the only way to stay a genuine believer in a goal that seems impossible is to spend all your time with other genuine believers.
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The workings of a bubble appear in other arenas as well. In politics, many successful movements pass through a long stretch of obscurity or even persecution, and enduring that often makes organizations almost superhumanly resilient. The party that governs China today descends from the organization that survived the Long March. A person willing to spend more than a year withdrawing over five thousand miles through harsh terrain is probably deeply committed to the cause, and in another setting is likely to be loyal. In Eastern Europe, the heirs of communist governments were often people who had lived through persecution and imprisonment by those same governments. In a U.S. setting, political currents such as neoconservatism and modern monetary theory have (in far more comfortable conditions!) spent long periods outside power, waiting and sharpening their ideas.
There is a sunk-cost element to that loyalty, though: once you have committed to a cause enough to suffer for it, you are less inclined to reconsider — because that would mean you suffered for nothing after all.
The bubble pattern applies to personal relationships too. Buying stock in Amazon or Pets.com in 2000 was a wager on how the next decade would unfold, but marrying someone can be a wager on how you’ll feel about that person over the next fifty years. That is a very serious matter, and an entirely irrational one without some dazzling degree of idealism.
But, as with other bubbles, the irrationality serves as a coordination device. It lets one person signal to another that their plans are meant seriously, and a small number of seriously dedicated, arguably irrational people can get a surprising amount done.
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The standard discussion of bubbles centers on financial ones, and for an excellent reason: because finance is made up of explicit promises about future cash flows from owning different assets, it requires a great deal of meticulous record-keeping. An economy tilted toward trading paper claims around has its downsides, certainly, but for historians it is a windfall; you can read all those papers long after the fact.
So although we do not know every gritty operating detail of the South Sea Company, or what its managers were truly thinking, we do have extremely detailed records of who paid how much for shares, and how they financed it. (This has enabled retrospective studies like this one, which shows, among other things, that women made more profitable trades than men during a bubble that burst 300 years ago. These records also help show that asset prices are tied to the real world, even beyond IPOs and other capital-raising events: High stock prices for specific companies tell people that something important is going on; they are a signal that adjacent businesses can be built.)
Financial markets offer another advantage for students of bubbles and irrationality: They push people to write down what they are thinking and why. An investment memorandum is a useful document, especially when it turns out to be mistaken; since it is written to defend a particular investment at a specific price, it contains many assumptions about exactly what sort of future will make that investment profitable. So a strong investment memo is a form of science fiction intended to come true — not impossible, since robots, online forums, cryptocurrency, nuclear weapons, space travel, and many other technologies were discussed in sci-fi long before they were actually built.
Sometimes, science fiction contains telling anachronisms. Star Trek and Star Wars have computers, but their worlds assume a Moore’s Law for spaceships and the 1970-2010 space stagnation for computers. Star Trek was accurate about some parts of the future: Physical goods became very cheap indeed, and Amazon’s price and delivery speed are quickly nearing the Replicator. But they missed other things. An optimist who bought Amazon in 2000 would eventually have done well, but part of that would have been luck; no one buying it then would have guessed how much of Amazon’s value would come from AWS rather than from selling physical goods. (There were dreamers in that direction earlier; part of the early attraction of ARPANET was the notion of open access to more powerful computers and programs, not just to static information, which at least points toward cloud computing.)
In effect, raising money is a kind of statistical time travel, moving money from a probable future into the certain present, at a price. But the other type of tech time travel is to stay very quiet about which futuristic products are about to be available to everyone. So managing bubble-like expectations means being a careful time traveler, and making sure the future appears exactly as it is supposed to, and that the company doing the time travel can survive the trip by not running out of cash, or hyping itself into a corner, in the meantime.
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Bubbles can have direct benefits, or at least create positive spillover effects: The telecom bubble in the ’90s produced cheap fiber, and when the world was ready for YouTube, that fiber made it more practical. Even the housing bubble had some upside: It produced more housing inventory, and because the new houses were fairly standardized, that created excellent training data for “iBuying” algorithms — the rare case in which the bubble is low-tech but the consequences are higher-tech. But even so, the price question always remains: how can you tell when the hype is justified?
Bubble valuation arguments often come down to disputes over frameworks. More specifically, they take two roughly equivalent forms:
Questions about how long a trend can persist: Is videoconferencing something we’ll all later view with irritation, or is it an increasingly practical substitute for face-to-face interaction? Will on-demand video take share from TV, or entirely replace it (and enlarge the market)?
If a trend is only a blip, then a company’s current growth rate is just the top of a wave before the collapse. E-commerce stocks had attractive charts in 1999, but so did Beanie Babies, and it took some judgment to decide which trend was more likely to continue. But because compound interest is so powerful, a trend that is only a little more durable than it appears can end up being an order of magnitude more consequential.
Questions about unit economics and feedback loops: When a company succeeds in releasing one product, does that make it much stronger at releasing the next one?
Angry Birds and Candy Crush struggled to turn their first major hit into a franchise-making machine, despite their parent companies’ best efforts. And it is hard to turn one hit movie into a series, although Disney seems to have made this something close to a science. But each time Amazon added a category, it gained users who would spend in its existing categories, and later merchants who could provide newer categories. Each search adjustment Google made gave it a new set of tools to monetize clicks, but also strengthened the habit of doing lots of searches. Facebook’s marketplace is partly a way to monetize the site, but it also gives buyers and sellers one more reason to log in every day; as it happens, one of the most addictive games ever released on the Facebook platform is called “Affordable Exercise Equipment Quest,” and I’m a daily active user.
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The two things that destroy a company in a bubble are too much optimism, and not being optimistic enough. A realist gets crushed in a bubble, because competitors can raise more, and eventually copy and outspend them. But someone who completely embraces the bubble story is also likely to be ruined, because the companies that most closely match the naive, recently backward-looking version of the bubble story won’t survive as conditions change; coming back to Amazon, the company turned out great even though the original thesis changed.
One way to reduce this risk is to build a business around maximizing future, rather than present, hype.
At the height of optimism, some companies will be tempted to announce vaporware, to draw investors in and push competitors farther out. The other option is to keep developing “stealthware,” new launches that will reshape the industry once they arrive — but that remain hidden until then. The first secret obviously can’t be used to attract investors, but when a company has a strong track record of positive surprises, investors can rely on the fact that they’re statistically likely to do well even if the exact shape of that success isn’t clear at the moment.
The stealth approach takes advantage of the healthiest parts of a bubble: A small set of people who see the future differently are the only ones who can build that future; but revealing its details ahead of time is borrowing credibility from the future instead of storing it. Having a vision for the future that is public and a roadmap for reaching it that is very private helps with fundraising and recruiting (I’ve interviewed at a couple companies not only because I wanted the job but because I was extremely curious about what they were really doing).
That picture of the future could be wrong, or the execution could be wrong. But this is not only business; it is science fiction, too. Taking part in a bubble is not just a business effort, but an artistic one as well, and science fiction can be good art for its own sake, even if the story doesn’t quite come true.