Big Market Delusion: The Case of Electric Vehicle Stocks

Abstract

The hallmark of a big market delusion is when the stock prices of all the firms in an evolving industry rise together, even though they are in direct competition with one another and with established firms in the industry. Investors become so enthusiastic about the market that they price each firm as if it will be a major success story. As a result, the aggregate value of the industry exhibits a fallacy of composition in which the sum of the parts (the market values of the individual firms) exceeds any reasonable estimate of the value of the business. The result is that prices become unsustainable. Over time, as data on actual sales and earnings become available, stock prices of the vast majority, if not all, of the companies in the “big market” decline. The case of the market for light duty electric vehicles provides a perfect illustration of the rise and fall of a big market delusion.