Background Note | HBS Case Collection | August 1987 (Revised December 1998)

Capital Market Myopia

by William A. Sahlman and Howard H. Stevenson

Abstract

Focuses attention on a phenomenon we call capital market myopia, a situation in which participants in the capital markets ignore the logical implications of their individual investment decisions. Viewed in isolation, each decision seems to make sense. When taken together, however, they are a prescription for disaster. Capital market myopia leads to over-funding of industries and unsustainable levels of valuation in the stock market. Uses the Winchester Disk industry to elucidate the phenomenon. Argues that capital market participants should have seen the problem coming. They should have known that valuation levels were absurd, based in large part on the greater fool theory. The data necessary to anticipate the problem were readily available before the industry shakeout began and stock prices collapsed. Offers some simple lessons to help investors and entrepreneurs avoid charter membership in the greater fool club.

Keywords: Capital Markets;

Citation:

Sahlman, William A., and Howard H. Stevenson. "Capital Market Myopia." Harvard Business School Background Note 288-005, August 1987. (Revised December 1998.)