The Market Efficiency of “Smart Money” During the Tech Bubble by Kevin Li Submitted to Professor Marc Weidenmier Introduction It is remembered today as an anomaly; in retrospect, market participants and professional investors look back with confusion and can only answer for their actions with unsatisfying hindsight. Few, if any, can say they saw the events that transpired coming. It was a time of jubilance and optimism in the wake of exciting technological development and opportunities for a new era. Newsweek said that the “digital revolution would create a zillion dollar industry.” 8 Prices of securities, especially those affiliated with the technology and internet sector, were inflated to unprecedented levels. But when the music stopped, losses were equally astonishing. The sentiment pulled a complete reversal. Many burgeoning startups shut down operations, and people came to the realization that their initial optimism for the tech industry was far too exuberant. 9 These types of price movements do not happen without the appearance of severe scrutiny and analysis, and deservedly so. Bubbles in any form and to any extent challenge the theories that underlie accepted principles of financial markets and create considerable disappointment for all parties involved. Animosity is commonly stirred up between conflicting interest groups as fingers are pointed and blame placed. As retail investors take massive losses, they cannot help question how Wall Street has fared, and/or if Wall Street performed some form of morally reprehensible “insider scheme” that should be punished. Nonetheless, a typically accepted idea that has taken hold in the minds of market participants and the general public is that industry professionals, the ones with access to larger amounts of capital, better and faster information, experience, and raw intelligence are the ones that generally stay out of “market folly.” According to the efficient market hypothesis, professionals are supposed to be the ones that mediate irrational noise trader perception on both sides of the spectrum, taking the contrarian view of both bullish and bearish action to make sure that securities are fairly priced and free of irrational emotion. The hypothesis implies that institutional investors, therefore, do not suffer anywhere close to the full extent of rapid price movements in the financial markets presumably fueled by emotion.