Irrational Exuberance and the Cinderella Syndrom

Irrational Exuberance and the Cinderella Syndrom / Dr. Mahfi Egilmez

Irrational exuberance describes a state of excessive optimism in which investors push the price of an asset far beyond its underlying or intrinsic value, largely ignoring economic and financial fundamentals. The phrase was famously used by then-Federal Reserve Chairman Alan Greenspan in a 1996 speech (1). It later became closely associated with the dot-com bubble, when valuations of internet and technology companies soared to levels that were difficult to justify by their underlying businesses.

Türkiye has experienced episodes that bear similarities to irrational exuberance. One recent example was the extraordinary investor enthusiasm surrounding initial public offerings (IPOs) in 2022 and 2023. Against a backdrop of high inflation and deeply negative real interest rates, large numbers of new investors turned to the stock market. Some newly listed companies saw their share prices rise sharply for days on end, in ways that appeared increasingly disconnected from their operations, profitability and financial fundamentals.

Social-media groups helped amplify the phenomenon. So did the stories of investors who had made substantial gains in a matter of days. The stock market suddenly became a subject of interest for a much broader segment of society, including many people who had never invested before.

As prices continued to rise, however, the price itself began to serve as a reason to buy. A stock attracted more attention because it was going up; greater attention pushed the price higher; and the rising price attracted yet more investors, many of whom were driven by fear of missing out, or FOMO.

This creates a more interesting question than simply asking why investors failed to recognize that prices had become excessive. Why do investors stay in the market even when they know they may be in a bubble?

Warren Buffett offered a memorable analogy in his 2000 letter to Berkshire Hathaway shareholders (2), comparing speculative markets to Cinderella's ball. Cinderella knows that the magic will end at midnight. She therefore has to leave before the clock strikes twelve.

For investors, however, there is a crucial complication: nobody knows when midnight will........

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