End of the 1990s telecom bubble

The late-1990s telecommunications bubble was a destructive information cascade: an early forecast of explosive Internet growth became conventional wisdom, encouraging companies to invest on a vast scale even after the growth rate slowed. In the account, the episode shows how collective decisions can go badly wrong when people follow others’ expectations instead of assessing information independently.

Forecast and Investment

In the Internet’s early days, traffic was growing at a rate of 1,000 percent a year. Beginning around 1996, that rate slowed dramatically, as might be expected as the initial surge moderated. But the change went unnoticed. The figure “1,000 percent” had lodged in conventional wisdom, and telecommunications companies began investing tens of billions of dollars, eventually hundreds of billions, to build enough capacity for the growth they expected.

The investments took place in an atmosphere where not investing seemed tantamount to suicide. Even people who doubted that the predicted traffic would arrive faced a chorus of confidence from those around them. As a result, expectations did not merely inform investment decisions; they helped make dissenting judgments harder to act on.

The Cascade and Its Consequences

The bubble illustrates how a cascade can replace independent judgment. Decisions made under the influence of other people’s expectations are no longer independent conclusions grounded primarily in private information. A few influential views—or views that spread because others have already adopted them—can shape the course of the whole group. In the telecommunications case, the industry continued to treat the 1,000-percent growth figure as a guide even as the actual rate of growth had slowed.

The conventional wisdom was seriously questioned only after the bubble burst. By then, most telecommunications companies were bankrupt or on the verge of going out of business. The delayed correction makes the episode a warning about collective decisions: widespread agreement is not evidence that a forecast is sound, especially when agreement itself is driving action.

Significance

The account contrasts this destructive cascade with collective decisions made by people who have diverse opinions, reach conclusions independently, and rely on their own information. In a cascade, those conditions fail: people’s choices become profoundly influenced, and sometimes determined, by the choices around them. The bubble demonstrates the cost of that dependence on others’ judgments, as the industry’s shared expectation translated into enormous investment and, ultimately, widespread corporate distress.