Wisdom of The Crowd
نویسنده
چکیده
This paper studies a market for new projects with endogenous information acquisition by experts (venture capitalists). It nds that the crowd-like behavior of experts is characteristic of investments in new elds where prospects of new projects are unknown but correlated and experts independently collect small bits of information: each expert acquires a signal about a project and invests when the signal is favorable. Given that the projects are related many experts are likely to invest when the projects are promising. The paper shows that uninformed investors at IPOs trust the crowd of experts and follow it: booms with high IPO prices occur when many experts are selling their projects because this conveys positive information about the projects. The analysis highlights that a critical mass of independent experts with the necessary expertise in a particular industry is essential for an active market for new projects to emerge: if experts are few each of them can manipulate the market by investing at random and driving the projects' prices up. Outside investors at IPOs anticipate this and do not follow the experts. As a result the IPO market for new projects ceases to exist which in turn discourages experts to start new projects.
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