Capital Market Myopia

William A. Sahlman; Howard H. Stevenson

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;

Format: Print

21 pages

Educators Purchase

Citation:

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

Problem Solving is the culmination of four years of research conducted by a small project team from 2015 through 2018 in collaboration with HBS alumni, students, faculty, and staff. Its broad and deep knowledge base is derived from a survey of 13 MBA classes (spanning 1955 and 2015), more than 200 interviews, and extensive archival and secondary research. The final result is a coffee-table style book with 300 plus pages of text brought vividly to life with photographs and quotations. Its more than 200 stories from around the world provide a sampling of alumni impact in education and lifelong learning, health and wellness, community and economic development, energy and the environment, and arts and culture.

Founded in 2008, Khan Academy was a global educational nonprofit with a mission to provide a free, world-class education for anyone anywhere in the world. By 2018, the organization had expanded into numerous content areas, product areas, and geographic markets. However, a newly minted 3-year strategic plan called for greater focus and prioritization to enable the young organization to maximize its impact. It also called for increased fundraising efforts to ensure long-term sustainability. The case poses several questions: How can the organization balance its far-reaching aspirational vision for transforming education globally with the short-term need for greater focus? Would the priorities set in the strategic plan enable Khan Academy to create systemic global change? How should donors evaluate the attractiveness and impact of a potential investment in Khan Academy relative to other organizations in the educational market? Was Khan Academy on the right path to ensuring long-term sustainability? What should Khan Academy’s management team do?

A framework for assessing new business opportunities and the business plans used to describe them is developed. Useful for aspiring entrepreneurs in MBA programs.

Faculty & Research

Capital Market Myopia

Abstract

Citation:

About the Authors

More from these Authors