Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble

Why Did the Bubble Form?

The bubble formed when many venture firms and investment banks altered their decision rules to exploit a growing public enthusiasm. The VCs gave up their traditional rules for making investments; the accountants began to accept questionable revenue booked by the dot-com companies; the investment banks abandoned their traditional rules for deciding which companies to take public. Finally, large investors such as mutual funds changed their own rules—their spending habits and attitudes toward risk. The Internet boom was greatly facilitated when many financial firms veered from their traditional operating requirements.

The excuse offered by each of these companies for the changes it made is that the circumstances demanded ...