Howard Dean, Joe Trippi, and Bubble Valuation

Continuing the theme of Howard Dean campaign and a bubble have been confirmed by his New Hampshire loss.

In a piece by Clay Shirky, Is Social Software Bad for the Dean Campaign?, he writes:

I'm getting the same cognitive dissonance listening to political handicappers explain Dean's dismal showing in Iowa that I used to get listening to financial analysts try to explain dot com mania with things like P/E ratios and EBITDA. A stock's value is not set by those things; it is set by buyer and seller agreeing on price. In ordinary markets, buyers and sellers use financial details to get to that price, but sometimes, as with dot com stocks, the way prices get agreed on has nothing to do with finance.

This sums up much which goes wrong in bubble-blowing. It's absolutely true that a stock's value is "set by buyer and seller agreeing on price". But it's a trivial definition of the word value. "What is this stock worth?" "What you paid for it". Right, but that's a joke, since it's re-interpreting the question in a semi-humorous way ("Call me a taxi","OK, you taxi!"). What people tend to mean by a stock's "value", is the complicated string of words "What is the return on investment for the level of risk, and is this greater or lesser than other investments for the same cost?". That's value - not price.

Now, this is a very complicated estimate - there's much mathematics, and superstition, associated with it. But that doesn't make it meaningless. When estimates of these factors (return, risk) depart from rational parameters, we enter bubble-land - and people get hurt (Enron!)

The comparable metric for a politician is roughly, metaphorically, "What is the worth of these policies, given that he/she has to get elected?" (return on investment == worth of these policies, get elected == risk)

The Dean Campaign was a classic bubble-stock. He was "thinly traded" (no real votes for a very long time). He was hyped by self-interested promoters, having found a new, naive, constituency which could be fleeced (net-heads). He had a gimmick (BLOGS / SOCIAL SOFTWARE, feel the *B*U*Z*Z*!), which was made even stronger for having a kernel of truth (fundraising being more efficient). He tapped into strong emotions (the war). And there was a ready supply of castle-in-the-air builders to tell us all about the New Era (of Regurgitant Pundocracy). All very standard.

And also classic is the way a rational assessment would show these to be blown way out of proportion. Howard Dean is a good guy, But he's not God. He's not even JFK. He has nothing so overwhelmingly favorable so as to make him even certain of victory. Yes, a big war chest is nice. But it wasn't 10 times, 100 times, more than his nearest competitors. Moreover, campaigning as an anti-war candidate automatically shut him off from the substantial number of pro-war voters (even Democratic voters). And was further vulnerable to being weakened by candidates who were somewhat anti-war, but less objectionable to those leaning pro-war. And his primary "market" (anti-war), weakened substantially due to world events. Plus he apparently blew the cash in some ill-advised ways.

Narrow market, over-hyped, lost share to more established players, crashed and burned (though to be fair, not to absolute zero) - where have we heard that story before?

When I read the following part of the New Republic article on Joe Trippi, my eyebrows raised up (emphasis mine):

Beyond its size, two things stood out about the Wave community. The first was the emotional investment the shareholders were making thanks to their interaction with each other and the company's management--an investment that produced incredible loyalty. "I think that the individual retail investor, no doubt about it, kept Wave afloat," says Barkeloo. "The loyal following kept the stock price up. The company should have gone away [when the tech bubble burst], but it didn't because of the retail base." The second thing was the way the investment community expanded. "It was word of mouth, grassroots," Sprague explains. "A buddy calls you up and says, 'Ah, I have a great stock.' You say, 'Where can I learn more?' He says, 'Join the chat board.'"

NO! Run away! You don't learn more on a chat board. A chat board is a nest of ranters, schemers, pump-and-dump scammers, manipulators, dreamers, and generally the worst place to learn anything except the many ways people can get things wrong (and their various reasons for doing so).

If presidential candidates were previously being sold as detergent, the new approach here was to sell them like a bubble stock IPO. That's indeed an innovation. But not necessarily a good one.

And I would have been flamed raw if I had said this while the bubble was being blown, before it had blown-up. At least nobody lost their retirement funds.

See also a NY Post column

Seth Finkelstein's Infothought blog (Wikipedia, Google, censorware, and an inside view of net-politics) - Syndicate site (subscribe, RSS)