The United States has long been recognized as the global hub of technological innovations. With the rise of Silicon Valley and global giants such as Google, Apple, and Microsoft, the U.S. has become the world leader in technology, creating millions of jobs and attracting magnificent amounts of investments. In the meanwhile, this strong culture of innovation has encouraged the establishment of over seventy thousand tech startups every year, realizing fervent dreams and pushing the frontier of humanity. However, a significant problem arose from this fashion of technological innovation. As the stock market became more available to ordinary people over the past few decades, the U.S. technology companies are often overvalued in terms of their abnormally high stock prices. The problem of overvaluations, which mainly due to investors’ tendency to pursue trending stocks and the prevalence of financial and social media hype, not only can lead to the shrinkage and collapse of technology companies, but also creates a huge risk that can shatter the economic stability of the U.S. and restrain its long-developed innovation culture. Without carefully addressing this issue with an education system revolution and a financial and social media reform, the invisible economic tsunamis will stay looming ahead of the future of humanity.

Overvaluation happens when a company’s value reflected by its stock is disproportionately higher than its real projected value, and it occurs a lot in the U.S. technology sector which embraces rapid innovation and disruption. Not only does overvaluation happen on individual companies such as Cisco System and Groupon, but also the entire technology industry during the 2000 doc-com bubble and 2010s social media bubble. However, some optimists might not credit this as a problem: If the craze over a stock will eventually cool down, and regression toward the mean will pull the stock price back to its due level, why not let the stock price rise so every investor makes money? Yet, optimists are wrong this time.

On a microeconomic level, overvaluation poses a threat to the individual companies, restraining their short-term and long-term gains. When an overvaluation of a company happens, investors who are still holding and buying-in the company’s stocks typically have high expectations toward its ability to generate profits. However, the company’s managers and executive officers, “in absence of amazingly good luck”, often cannot operate the company to meet this market expectation in a timely manner (Martin). In fear of losing investment from stock investors that will lead to a sharp price drop, they are forced to make decisions that make the company seemingly perform well in the short run, even though these top executives know that the decisions will ultimately fail (Martin). For example, overvalued companies often invest in fashionable technologies that are hot and hyped at the time. Global Crossing, a former leader in telecommunication, was among Wall Street’s favorite companies during the 1990s Internet boom and was worth $47 billion dollars in 1999 thanks to the doc-com mania. To convince the investors and shareholders of this evaluation, Global Crossing spent billions on laying fiber-optic telecommunication cable, a trending technology that many Wall Street analysts saw as a sign of company growth (Fabrikant). Ultimately, Global Crossing utilized only a few of its cable capacity and sold off these fiber-optic assets for a low price to counteract other costs. Its stock value also dropped as the Internet craze cooled down. In 2002, the company filed for bankruptcy and was later acquired by another company for $3 billion (Martin). While a company, even a giant like Global Crossing, was overvalued, its fate became uncontrollable because of the compelled decisions company managers must make to maintain public expectations. These quick profit generating strategies are often short-sighted and lack well-rounded research, making companies vulnerable to external risks. Ultimately, when risks are no longer manageable, shrinkage and collapse of companies become inevitable.

While the detrimental impacts to individual companies are dreadful enough, overvaluation has more severe consequences to humanity, as they can rattle the economic stability and restrain technological innovation. Rampant overvaluation can sweep the technology industry during the period of low interest rate and capital-gain tax rate since the cost to borrow is low. Thus, tech companies are more capable of acquiring debt to finance their ambitious projects, leading to a growth of the entire industry. Evaluation of technology companies grows rapidly due to the propelling forces of venture capitals, investment banks, and individual investors who wish to “take a ride to the moon” with the company growth, ultimately leading to overvaluation across the technology industry. Between 1995 and 2000, the technology industry boomed due to the growing Internet and extremely low interest rate; within five years, the NASDAQ index rose for more than eight hundred percent (Salvucci). However, widespread overvaluation created a huge risk for the economy. When the bubble bursts, a sharp downturn of the technology industry will repel the potential investors and panic other industries, leading to an economic recession (Salvucci). In 2002, the doc-com bubble burst. Within a short time, the NASDAQ index dropped 78% from its peak of 5,048 to 1,114. The crash quickly rippled to other industries such as manufacturing and advertising, ultimately leading to a bear market that drained investments for all the industries and caused a recession that took two years to recover (Salvucci). Furthermore, many tech companies, such as Intel and Cisco System, had to cut fundings for long-term R&D projects to reduce costs and focus on profitability (Hamblen). Venture capital firms also shift focus from early-age startups to more established companies, leading to fewer resources for new companies and ideas. Innovation in the technology sector became severely stifled. The severe consequences of overvaluation, therefore, not only are detrimental to the individual companies, but pose a threat to the economic stability and innovative culture of the U.S..

While overvaluation is determined by various social, financial, economic, and psychological factors, a main contributor to this problem is the public investors’ tendency of pursuing trendy stocks. Tech startups are often started with the help of venture capital firms that have wild returns. Many tech giants, such as Google, Apple, and Facebook, are invested by venture capitals at starting stages before making any profit. However, VCs also face a high failure rate of eighty percent because tech companies have a rapid burn rate of money at their developing stage (Heller). Therefore, instead of guiding companies in their best directions, VC firms are prompt to prioritize companies’ growing valuation so the VC managers’ equity can reach a desirable target. As a result, these VC firms became a wild valuation pump that often failed to consider companies’ fundamental growth or social responsibility (Heller). When tech companies launch from the private market to the public, this trend of valuation-focused investment strategies are carried on. For example, many investors utilize stock price as the only metric for evaluating an investment and tend to ignore or unaware of other important factors that indicate a good company. Since humans possess the nature of loss aversion that outweighs the pain of losing over the joy of gaining, stock investors are therefore afraid of missing out on lucrative gains that a growing share price might bring. As a result, many investors are prone to buying hot, growing stocks emotionally without considering other unpopular companies that have strong fundamentals and growth potentials (Samson). When these emotions dominate investors, the entire stock market tends to be irrational and sensitive to stimuli that contain positive information about a stock. In the technology sector, especially, where the stories about garage entrepreneurs, rounds of billion-dollar financing, and world-altering technologies are so popular, news and hype surrounding a company can usually drive up the stock price more aggressively and permanently, leaving the companies in risk of overvaluation.

Despite its widespread prevalence, efforts are implemented to tackle this tendency of pursuing popular stocks. One such measure is the Investor website initiated by the U.S. Securities and Exchange Commission. The website provides investors with assistive information about the stock market, knowledge to interpret financial statements, techniques for evaluating a company’s management, and methods of diversification and risk management, helping them with selecting the best investment strategies (SEC). In this way, investors can possess the ability to rationally analyze a company using factors such as income and cash flow statements, managerial positions, and social impacts, rather than merely using stock prices. Similarly, there exists other education-purposed websites such as Investopedia, Seeking Alpha, and the Street that contain extensive financial tips such as trading strategies and basic pricing models. Seemingly, these websites are useful, handy tools that make professional finance knowledge available and accessible to the general public; however, their capacity to undermine the aforementioned tendency of purpusing trendy stocks is highly insufficient. First, these websites are individual, passive initiatives that require investors to locate by themselves. A study by the National Financial Educators Council has shown that approximately 42.7% of American adults failed to pass the National Financial Literacy Test (NFEC). Therefore, many ordinary investors are not equipped with professional financial knowledge, which makes it difficult to delve into various websites and critically discern the integrity of information (NFEC). Investors could be lost in the ocean of authentic and artificial information, leading to a low coverage rate of these websites. Moreover, because of the wiki form of these websites, in which notions are scarcely scattered in web pages, the knowledge provided by these websites lacks consistency. In other words, the financial and investment tips in these websites are disorganized and not related together in a consistent way, which unintentionally minimizes the websites’ educational usage. Altogether, these educational initiatives are insufficient measures to mitigate investors’ tendency of chasing the market, and more a comprehensive and cohesive solution is necessary to provide investors with the knowledge and tools they need to make rational and informed financial decisions.

An approach to tackle this leading factor of overvaluation is through an education system revolution. According to Functionalism, an educational theory developed by Dr. Kliebard in 1985, an educational curriculum should be “derived from an analysis of the important functions or activities of adult life”. As investing becomes a critical part of contemporary life, an inclusion of financial education in the American educational curriculum becomes imperative. Currently, only 25% of millions of high school students in the United States have graduated with completing a personal finance course (Reinicke). Although this proportion is a huge improvement from 16.4% in 2018, more can be done by the U.S. Department of Education, who can leverage its regulatory power to require finance courses in middle and high school. Similar actions have been done regarding science courses. In 1958, President Eisenhower signed the National Defense Education Act, which aimed at strengthening science education and increasing the number of Americans pursuing careers in science and engineering, in response to the demands of the Cold War. This act provided funding for science and math education programs, ultimately leading to an inclusion of science courses for middle and high school graduation requirements in many states, enriching the public with scientific thinking (House). Therefore, with the help of government authorities such as the Department of Education, an inclusion of required financial education programs in secondary education will significantly improve financial literacy in the U.S., empowering ordinary investors with analytic tools to rationally access their investments. Similar to science courses, middle and high school can consider adding financial courses that are tailored to different ages and abilities, building a robust financial background for middle-schoolers and introducing more advanced topics for high-schoolers. For example, middle school can introduce students to financial literacy, budgeting and saving, and basic investing; more advanced, high school can start introducing students to micro and macroeconomics, asset management and stock market, evaluation metrics and models, and risk management in investing. By introducing a wide range of financial courses to middle and high school, students will have the opportunity to appreciate the various real-world investing techniques and possibly avoid the chasing-high mentality when they are investing in the future.

Another unignorable factor contributing to the overvaluation problem is the prevalence of financial and social media hype. Stock analysts, for example, often are the cause of massive buy-in of stocks. Reputed as trustworthy due to their professions, stock analysts have huge influence on the stock market by posting market research and predictions. However, many analysts are driven by the desire for clicks and views and therefore post sensationalized predictions that are misleading and based on false information. The Market Manipulation research by the U.S. Securities and Exchange Commission has shown that many analysts publish recommendations of a company’s stock as “must buy” or “hot buy” simply because they are paid by the insiders or promoters related to the company to pump up the stock price (SEC). This can lead to disastrous consequences, as stocks being hyped are driven too high compared to their real fundamental value. Moreover, financial news, which also requires catchy titles to ensure substantial views, contribute to the stock overvaluation issue. Trendy investments with shiny names, such as cryptocurrencies, NFTs, and SPACs, are often overemphasized in financial news. For example, the number of new articles about NFTs grew from around 200 to more than 26,000 in 2021 alone, accompanied with NFT’s total dollar price increase of 62,912% in the same year (Bahr). Without including the risks involved in such investments, these financial news can cause a trend of speculative investing, in which investors adopt strategies that aim to profit from rapid price appreciation, such as the doc-com Internet bubble. Lastly, as the main platform for communication, social media drives the dissemination of misinformation and hype over companies. Meme stocks, such as BlackBerry and Nokia, became popular through social media platforms such as Reddit. The multiplier effect of spreading narratives created speculations and hype among these popular stocks, and as a result, their prices skyrocketed. However, their prices plummet quickly as craze fades away from unmatching underlying fundamentals, leaving speculative investors with regretting sigh on their risky decisions.  

Therefore, besides an education system revolution that elevates the public financial literacy and rationality in the stock market, policy makers should also implement regulatory policies that encourage a more responsible financial and social media, minimizing the spread of misinformation that can lead to a grand level of overvaluation. For example, policymakers can initiate an industry-wise encouragement of more comprehensive financial news. Medias such as Wall Street Journal and Yahoo Finance that have high influence on investors should incentivize comprehensive, informational posts over sensational posts. Instead of articles that focus on merely the downside or upside of an event, editors should be encouraged to post a comprehensive review of the event that embrace opposite perspectives. For instance, when a trending technology such as Metaverse emerged, instead of only posting its speculative applications and future values, news articles should also include technological limitations that are not being addressed and risks of such investments, which prevents a public trend of hype that could lead to an industry-wise speculative investment. Such transformation can be achieved in either increased algorithmic recommendation for comprehensive posts or monetary incentivization to responsible editors and analysts, both of which maximize public investors’ accessibility to accurate information. Furthermore, policy makers should leverage social media platforms to minimize the spread of financial hype among investors. Similar to Twitter’s COVID-19 misleading information policy, social media companies could enforce misleading information policy on posts related to financial and investing advice such as stock price predictions. For example, by simply requiring users to mark their related posts as “Financial/Investing Advices”, social media platforms can add a warning tag of “potentially misleading or false information has risk of financial losses. Please discern the factuality of information before making investments”. This can greatly improve the spread of misinformation, which has been shown by the research-proven effectiveness of Twitter’s misleading information policy to mitigate the spread of COVID-19 related misinformation (Sharevski). Similarly, social media platforms should implement algorithms that increase the exposure of posts that are self-tagged so more users will be willing to tag their investing and finance related posts. With such misleading information policy, social media users can therefore be reminded of rational investing when facing potentially inaccurate information, ultimately leading to a more reliable financial atmosphere that prevents widespread overvaluation from happening.

At the end of the day, no one would like to experience another collapse of technology giants or severe economic recession. These abominable consequences of overvaluation, however, could be possibly avoided through implementations of adequate countermeasures. Through an education system revolution that introduces financial courses to middle and high school and a financial and social media reform that mitigate the spread of hype and misinformation, the world will benefit from an elevated level of financial literacy and rationality in the stock market and more responsible financial and social media, both of which lead to a more reliable investing atmosphere. The problem of overvaluation, then, will shatter at its deep root.

Works Cited

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House. (n.d.). National Defense Education act. US House of Representatives: History, Art & Archives. Retrieved April 28, 2023, from https://history.house.gov/HouseRecord/Detail/15032436195

Kliebard. (n.d.). Sage Publications Inc | Home. Retrieved April 29, 2023, from https://us.sagepub.com/sites/default/files/upm-assets/94876_book_item_94876.pdf

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Reinicke, C. (2022, April 22). Nearly 1 in 4 students in the U.S. has access to Personal Finance Education this year. CNBC. Retrieved April 28, 2023, from https://www.cnbc.com/2022/04/22/nearly-25percent-of-us-students-have-access-to-personal-finance-education.html

SALVUCCI, J. E. R. E. M. Y. (n.d.). What was the dot-com bubble & why did it burst? – thestreet. Retrieved April 29, 2023, from https://www.thestreet.com/dictionary/d/dot-com-bubble-and-burst

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Sharevski, F., Alsaadi, R., Jachim, P., & Pieroni, E. (2022, March). Misinformation warnings: Twitter’s soft moderation effects on covid-19 vaccine belief echoes. Computers & security. Retrieved April 28, 2023, from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8675217/ 

Cover Picture by Martin, R. L. (2016, April 5). The overvaluation trap. Harvard Business Review. Retrieved April 28, 2023, from https://hbr.org/2015/12/the-overvaluation-trap