Social media bubble: How can it exist if everyone believes in it.

The Most Puzzling Bubble in the World

A blog about business and economics.
Nov. 22 2013 12:59 PM

The Most Puzzling Bubble in the World


Is there a "bubble" in the valuations of social media companies? Most people I know seem to think there is. But more importantly, a Bloomberg poll of finance decision-makers finds that most of them do too.

I'm inclined to see this as proof that there probably isn't a bubble. You can easily imagine a situation in which Chinese house prices form a bubble of some kind and most western finance types believe there's a bubble, because there's a limited amount that western finance types can do to make money off such a bubble. China's financial markets aren't very open to outsiders, the government controls the banking system very tightly, and houses as an asset class are very hard to short.


But internet and social networking stocks? You'd think that if market actors believe Facebook and LinkedIn and Twitter are overvalued, they would act on that belief and push share prices down. And you'd think that a depressed share price for Facebook and Twitter and LinkedIn would depress valuations for Snapchat and other privately held companies. And indeed for a while Facebook's shares were sagging below the IPO price and that did seem to be restraining Twitter's valuation and keeping then from staging their IPO.

Different people use the word "bubble" in different ways and I'm not sure how scientific this Bloomberg poll really is, so don't take this analysis and go bet money based on it. But I do think this bubble paradox is relevant to the idea of trying to curb bubbles with regulation. To take policy action against something, it helps to have most people approve of taking policy action. But a bubble is most likely to be occurring when conventional wisdom says there is no such bubble, in which case mustering the political support for action will be hard.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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