Behavioral finance specialists will have a field day with the Facebook IPO as it speaks volumes to an issue that differentiates them from those that espouse the efficient market hypothesis -- namely, that investors can be vulnerable to mistakes dictated by unconscious biases.
Or, put another way, the manner that our brains have evolved and work may not always result in the best investment decisions.
And the implications could go beyond this.
Facebook was one of the most hyped IPOs in history, and understandably so. The company has over 900 million users around the world, is a leader and a major disrupter and, as such, continues to redefine not only social networking but also a growing number of people's interactions with the internet and with their mobile tools.
In response, the underwriters set the IPO price at the top end of a range that, already, had been specified above initial market expectations. They also increased the number of shares offered to the public, and they reserved a well-publicized allocation for retail investors.
All this could well have amplified the risks of a mistake which investors can make -- namely, to overpay for a very familiar and hyped name. Indeed, the behavioral finance literature cautions investors against falling into the trap of letting familiarity trump risk-adjusted valuations.
In the event, after the initial pop on the delay opening on Friday, Facebook sold off and closed just above the initial pricing of $38.
Moreover, media sources reported that the support of underwriters was needed to maintain the market price above this psychological level. They succeeded on Friday only to see the stock trade down dramatically this morning.
While it is still very early days, the initial post-IPO market action suggests that behavioralists may well have a new case study to analyze.
And this Facebook episode could also serve as a timely reminder for investors to consider not only what they invest in, but also how they invest-- especially in hyped names.
These are not the only takeaways.
Several pundits had observed that the Facebook hype could act as a catalyst for the return to the equity markets of retail investors who remain on the sidelines.
What occurred in the last two days of trading, along with the NASDAQ's technical difficulties on Friday, suggest that we may need to wait for another, more legitimate catalyst.
Cross-posted from CNBC.com.
But that's all it does, so don't over-estimate its importance. The IPO hype is based on smoke and mirrors - so that the man behind the curtain can keep playing his game.
As others have written, Facebook does not have "customers," but users who pay nothing except a large loss of privacy.
Ahh yes, the new next best thing!
PT Barnum was right....
Would $9.50 = 4 billion shares? with 3 billion unsold? or sold-out, closing at $6.66?
Morgan-Facebook wanted to make $38 billion Friday. Why 38? Why not 50? Why not a billion shares at $31, close at $34, make $3 billion...and Facebook wins out-of-the-gate?
Does the 'efficient market hypothesis', consider hype+collusion? The--hyping--Media gleans consumers from Facebook's 'alleged' 900 million social networking pool. Sans collusion, what's the product really worth?
A bundle...if Facebook continues exploiting advertising via unfettered info. gathering + position tracking and Mark Zuckerberg eventually becomes Big Brother.
Zilch, if Google-Government supports internet privacy...if their advertising paradigm has already peaked...if Facebook catches My-Space disease.
Will college girls stop snapping cell-phone-photos of their booties in bathroom mirrors? How many of those 900 are failed start-ups? moms no longer eavesdropping on their children? or one-time listings?
Is Facebook really Rapebook? reconnecting incest mom to her teen? app for that facilitating dance-club assaults? Zuckerberg already faces a $15 billion class-action lawsuit over 'alleged' privacy infractions.
Is Facebook an investment? or a gamble? a one-armed bandit for Geko's with millisecond auto-trade software playing real-time buy-low sell-high.
Overpricing -- if they actually did that -- is a new trick...combining that with a push for small retail investors seems cheesy.
If you can explain to me how Facebook's business model (sell advertisements that no one looks at) justifies their $104 billion valuation, I'll gladly invest in it.
And no, they don't have 900 million customers. Customers buy things.