Question

(This is a real event that occurred less than one year ago. I’ll provide a video and a long article describing the history of the company and the events that took place.)

SoftBanks $4.7 billion loss on WeWork investment is one of the most recent puzzles that is difficult to be explained by the “rational” model.

WeWork is a company that provides shared workspace for startups and other small firms. Founded in 2010, it is headquartered in New York City.

One of the biggest investors in WeWork is SoftBank’s Vision Fund—which has a 100 billion dollars under management, making it the world’s largest tech fund.

In January 2019 SoftBank valued WeWork at $47 billion dollars.

Just a few month later WeWork lost almost $40 billion in value, after an attempt to go public backfired.

And Softbank's lost a stunning $4.7 billion (so far) on that single investment.

By using concepts that we have learned in this class can you offer an explanation on this “valuation bubble” or “valuation illusion” from behavioral finance point of view.

How can SoftBank's managers, which are considered some of the most sophisticated investors in the world, make such a foolish decision?

Answer 1

This foolish decision can be attributed to a few behavioral science biases :

• Overconfidence - A investor's capabilities and and intelligence are over estimated by the investor, resulting in a superiority complex, which leads to poor decisions. The investors could have had too much confidence in their abilities as investors
• Herd behavior - Investors as a group tend to exhibit herd mentality, where the actions of the group are copied by the individuals. The actions of the some influencers in the group to overvalue WeWork could have caused all the members of the group to copy the overvalued figures
• Anchoring - When a valuation number is heard, it is taken to be correct and its value tends to be ignored.
• Confirmation bias - Information supporting our views is given more weight, and information contrary to our views is filtered out. The WeWork investors could have displayed this bias in filtering out information which indicated that WeWork was overvalued.