Academic journal article Economics, Management and Financial Markets

You Paid How Much for That Dotcom Stock?: Sensemaking during Ecological Change

Academic journal article Economics, Management and Financial Markets

You Paid How Much for That Dotcom Stock?: Sensemaking during Ecological Change

Article excerpt

'Man: A being in search of meaning. "

Plato

1. Introduction

Throughout history there have been periods of investors apparently setting aside rational thought in hopes of getting rich quick. Two of the most notable are the Tulip-Bulb craze of 1593 in Holland and the South Sea bubble of 1720 in England. The Tulip-Bulb craze saw the price for tulip-bulbs reach extremely excessive heights. At its peak virtually everyone was dealing to some extent in the bulb market. Similarly the South Sea Bubble saw the stock shares of new companies surge skyward. One company was supposedly going to be so influential that investors were asked to invest without knowing anything about the business, all to keep the secret. With all the hype over future riches, investors readily invested, and the promoters left the country with the investor's money. Like the Tulip-Bulb craze, the South Sea bubble saw almost everyone of the day involved in stock speculation (Malkiel, 1999).

The period from 1997 to 2001 was perhaps one of the wildest rides Wall Street has ever seen. This was the dotcom era, a four-year run of astronomically high stock prices for "new economy" companies that put the investment world into a dither. Rationality appeared to go out the window with the lure of instant riches. Alan Greenspan, the chairman of the Federal Reserve, declared that it was a period of "irrational exuberance". Why do investors readily set aside rational thought and recklessly pursue instant wealth? Why are standards for determining value ignored? Sensemaking, which "involves the ongoing retrospective development of plausible images that rationalize what people are doing (Weick, Sutcliffe, & Obstfeld, 2005, p. 409)", can offer insights into the investment decisions made during the bubble.

Weick and colleagues (Weick et al., 2005) make the point that sensemaking occurs at the crossing of action and interpretation. It gives meaning to actions in a world where cognition trails action. Through sensemaking, micro-actions work to create macro-changes (Weick et al., 2005) linking the two levels of analysis. While some (e.g. Weick et al., 2005; Weber & Glenn, 2006) have suggested that sensemaking can be utilized to explore the individual's role in a larger social and historical world, much of the empirical work remains at the individual and organizational levels (e.g. Gioia & Chittippedi, 1991; Mathis & Lawrence, 2007). However given the constructive nature of sensemaking, the possibility exists to apply sensemaking theory to explore how individuals make sense of the larger institutions and social world, such as rises and falls of the stock market.

According to Weber and Glenn (2006), sensemaking can bridge the micro and macro with the macro institutional environment providing the context, and the sensemaking process providing the micro interpretation of environmental events. It is at this interplay of ecological change and enactment that the individual and the social world find meaning. While institutions typically provide constraints to individual behavior, they can also prime, edit, and trigger sensemaking (Weber & Glenn, 2006). So, in essence, a change in the environment creates a gap in an individual's understanding of the world and starts the process of sensemaking to create meaning and a sense of order (Mathis & Lawrence, 2007). When moving the research on sensemaking from the individual and organizational levels to a more macro level of analysis, one needs to find an appropriate ecological event. An event that is grand enough to be seen as an important social shift so that an appropriate amount of data can be collected, a perceived significant challenge to the established order, with widespread communication regarding the event, and impacting multiple organizations, markets and individuals. The dotcom bubble is one such event.

The dotcom bubble provides an ideal opportunity to explore the role sensemaking plays in trying to come to terms with rising internet stock prices and the sudden bursting of the bubble. …

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