BRITISH economist John Maynard Keynes is remembered primarily for his contributions to macroeconomics with particular consideration given to his controversial views regarding fiscal policy. However, he also deserves consideration for his role as a true forerunner of behavioural economics.

Keynes coined the term ‘animal spirits’ in his spectacular General Theory of Employment, Interest and Money. Animal spirits refer to emotions and psychological biases which inevitably induce a substantial portion of human behaviour. It is conceivable that animal spirits have contributed their fair share of irrationality in the securities markets over the decades. A recent case of such an irrationality relating to Zoom Video Communications (ticker symbol: ZM), which is listed on the National Association of Securities Dealers Automated Quotations (Nasdaq), is detailed as follows.

Over the past few weeks, the Zoom videoconferencing service has emerged as the communication lifeline for organisations during the Covid-19 pandemic. Zoom (and its variety of virtual backgrounds) has become a seemingly ubiquitous feature in a variety of online meetings, for activities ranging from group yoga sessions to Fortune 500 executive meetings. The result? Zoom’s users soared from 10 million a day in December to 200 million in March. Its stock price is up 90 per cent on the year, giving the company a market value of $43 billion.

In 2013, after the announcement by social media company Twitter regarding going public, the stock of retailer Tweeter Home Entertainment soared upwards of 2,100pc – despite being in bankruptcy proceedings at the time

This ascent in Zoom common stock caused a headache for the Securities and Exchange Commission (SEC), as investors confused Zoom Video Communications (ticker symbol: ZM) with another company called Zoom Technologies (ticker symbol: ZOOM). ZOOM, an over-the-counter penny stock which is allegedly headquartered in Beijing, has soared upwards of an eye-popping 900pc year-to-date.

The SEC stepped in and made the following announcement: “Zoom Technologies (ticker ZOOM) is NOT the similarly-named popular video communications company. Today the SEC suspended trading in the securities of Zoom Technologies.” According to the SEC, Zoom Technologies has not made ‘any public disclosure’ whatsoever — including reporting on its finances or ‘its operations, if any’ — since 2015.

This is not the first time a case of mistaken identity in the ticker symbols of a high-profile company has led to erroneous security price appreciations.

In 2017, during the build-up to the initial public offering of Snap Inc. (parent company of social media company Snapchat), investors bid up shares of Snap Interactive — before Snap Inc. ever went public. In 2013, after the announcement by social media company Twitter regarding going public, the stock of retailer Tweeter Home Entertainment soared upwards of 2,100pc — despite being in bankruptcy proceedings at the time. In 2014, securities of the company Nestor (ticker symbol: NEST) mysteriously shot up despite being in receivership. The cause? Google had announced the deal to purchase Nest Labs (an entirely separate company) for $3.2bn. It seems that the markets seem to be less efficient than what a myriad of academic institutions propose.

Going back to the issue of the logic behind Zoom Video Communications commanding highly optimistic share prices (its market value is more than the Ford Motor Company and Hilton Hotels combined!). Counterintuitively, the surge in usage isn’t necessarily a confirmed benefit to its business, because a large number of its new users are not, and may never be, paying customers. It may not be sustainable to give your product away for too long. Zoom’s success when the world returns to normal is anything but assured. Consideration must also be given to the variety of Zoom’s competitors with deeper pockets — including Microsoft Teams, Facebook Messenger Rooms, and Cisco WebEx.

This falls neatly in line with the General Theory of Keynes, who wrote that most of our decisions to do something positive can only be taken as the result of animal spirits — “a spontaneous urge to action rather than inaction, and not as the outcome of the weighted average of quantitative benefits multiplied by quantitative probabilities”. By moving away from the probability-based measure of investment risk as prescribed by Lord Keynes, individuals alter their position from one of investors to one of speculators, acting on noise and animal instincts.

Recurring cases of excessive optimism in securities may be a boon to aid technological development through the availability of much-needed capital. However, as a whole, shareholders will perform poorly due to the failure of some high-profile enterprises to reach profitability, rendering these security holdings essentially obsolete in the long haul. It is for this reason that excessive optimism due to certain psychological biases should be tempered across the industry. This should particularly be the case for money managers, taking on shareholding risk by acting as a proxy to allocate their investors’ capital. Indeed, as the tendency of incentive-caused bias and the presence of agency costs in the minds of the money managers prevail, such behaviour is unlikely to be dampened any time soon.

In relation to the topics mentioned above, the writer reaches the following conclusions. To prevent errors in purchasing the wrong securities, please doublecheck the ticker symbol. To prevent excessive optimism which leads to long-term shareholding losses, filter through the fundamentals of a business through the sceptical lens of a business owner who is purchasing the whole company, not just a fractional holding in the form of common stock.

The writer is an incoming graduate student at Harvard University and a graduate of University College London

Published in Dawn, The Business and Finance Weekly, June 1st, 2020