Explaining booms, busts, and errors [microeconomics]

How will I explain dot-bombs to my kids? A dozen years from now my children might be old enough to understand complex human behavior. Yet I anticipate that they won't look back on today's events with awe. Rather, they will view them as history, with the disdain that comes with twenty-twenty hindsight. Why did so many Internet-related firms lose so much money? To be sure, the irrational exuberance of the various participants is part of any explanation. However, that alone seems an unsatisfying answer. Many analysts thought companies and their investors were behaving reasonably. Tens of thousands of people thought that dot-coms were creating economic value. As the stories of economic loss roll in, three systematic errors common to many of the players emerge. Participants made errors in misforecasting adoption behavior, by underestimating operational requirements, and having overoptimistic expectations of success. Although all these errors arose from exuberance, only the last looks irrational. Understanding these errors will help us comprehend the origins of business booms and busts, a fact of life in technology markets.