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Although speculative bubbles are often attributed to the irrational exuberance of neophyte investors, young investment pros also are to blame, according to Harvard Business School's Robin Greenwood and Stanford University’s Stefan Nagel. In a new paper, the researchers conclude that — counterintuitively, perhaps, given generation XYZ's ostensible comfort with all things digital — mutual fund managers under 35 years old fare worse in evaluating technology stocks than their more wizened (yet wiser) counterparts.
“Our hypothesis is that younger managers, and inexperienced investors more generally, are more likely to extrapolate past price movements when forming their forecasts of future returns,” Greenwood told HBS Working Knowledge.
Fund managers show little performance variation by age as bubbles start to inflate, but younger investors remain overexposed to tech stocks as the trend accelerates. By contrast, the research shows, older investors have learned that past market returns do not predict future performance, and they are more likely to have endured previous downturns.
With clean energy and Web 2.0 tech bubbles floating into view, might younger venture capitalists be prone to the same youthful follies? —Alain Sherter
See interview with Robin Greenwood in HBS Working Knowledge
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