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Behavioral Phenomena

On May 20, 2004, The Wall Street Journal ran a front page story entitled "Biotech's Dismal Bottom Line: More Than $40 Billion in Losses. " The article makes several points. First, the majority of biotechnology firms have produced losses, with the result that the return to investments in the biotechnology sector between 1981 and 2004 lies below the return from holding Treasury bills. At the same time, a few biotechnology firms, such as Amgen an Genentech have been spectacularly successful. The article quotes one investor who likens biotechnology stocks to a lottery. Despite its track record, in 2003 U.S. biotechnology firms succeeded in issuing almost $4 billion in new equity. The article mentions that venture capitalists also provided funding to biotechnology start-ups hoping to earn a profit when these firms go public. Discuss whether there are any behavioral phenomena involved in the issues raised in the article.

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Behavioral Phenomena

The issues raised in this article are that even thought the return to investment in the Biotechnology sector between 1981 and 2004 lies below the return from holding Treasure bill, US biotechnology firms have succeeded in issuing almost $4 billion in new equity. There are several behavioral phenomena involved in this. First there is a strong cognitive bias that seems to create this phenomenon. There are investors that wait for ...

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