Just because you love shopping online doesn't mean that online retailers will turn out to be good investments. That's because people tend to focus on the absolute size of a price change, not its relative value. And, as anybody who has ever been a teenager knows, people are much more willing to take risks when they're in groups than when they're alone. That's why the visitors to online chat rooms and message boards egg one another on so wildly as Internet stocks surge up or down. And it helps explain why the price of these shares is so often divorced from their business prospects.
Investors also have a bad habit of beating themselves up over past mistakes.
It now seems obvious that in 1986 Microsoft was sure to be a big winner. But in a series of brilliant experiments, psychologist Baruch Fischhoff of Carnegie Mellon University has shown that the knowledge of how an event actually turned out changes our original opinion of how likely it was to occur in the first place. Microsoft's spectacular gain makes picking long-term winners seem much easier than it really is, because it makes us forget that in 1986 several other companies, such as Novell and Borland, looked just as likely as Microsoft to dominate the software business. But 200 years of corporate history show that the early leaders in a dynamic industry almost never turn out to be the victors in the end. If you think the Internet has transformed human life more than anything else, here's some quick history.