Why does the market always overestimate the short-term impact of new technologies? | Cat Cat's Market View

In the capital markets, there is a well-known rule: “The market always overestimates the short-term impact of new technologies but underestimates their long-term effects.”

Today, let’s talk about the first half of this rule: why does the market always pay too high a price for the short-term impact of new technologies?

Throughout human evolutionary history, technology has always brought about extremely important changes to society. It can be said that these changes have thoroughly transformed the structure of human society in the long run.

Imagine if our society today used the technology from the Shang Dynasty around 1500 BC. If we farmed, smelted metals, and woven fabrics using Shang methods, would we achieve the lifestyle we have today? Obviously not.

Since technological progress has so greatly changed human society over the long term, why does the capital market always overestimate its short-term role? Let me explain slowly.

It’s important to understand that although technological progress has dramatically changed human society in the long run, in the short term—meaning over a few years—the changes it brings are often quite limited. This limitation stems from two main reasons.

First, the development of new technology is rarely a sudden leap; it requires gradual improvement and refinement. For example, the recent surge in large language models initially had high error rates; the popular “Lobster Program” in the tech world has been shown to be inefficient with surprisingly high error rates; and the embodied robots often reported as “only capable of dancing, performing martial arts, and doing somersaults.”

Even looking back decades or over a hundred years, the early adoption of new technologies like cars, airplanes, and mobile phones was far from perfect. Any new technology, after its invention, needs the market demand side to gradually refine and improve quality and efficiency. All of this takes time.

Second, the limited short-term development of new technology also comes from the maturity of existing technologies.

For new technologies to succeed, they often attempt to replace existing societal technologies. For example, large language models aim to replace search engines, libraries, and human analysts; the “Lobster Program” tries to replace human secretaries; cars and airplanes aim to replace horse-drawn carriages; mobile phones aim to replace landlines.

Compared to new technologies, mature existing technologies have already formed a complete industrial chain. From demand to supply, this chain has been refined over decades by millions of people, approaching perfection. Old technologies may be outdated, but their high efficiency, enormous economic scale, and social integration are unmatched by new technologies.

When highly efficient old technologies encounter emerging, nascent new technologies, even if the new ones look promising, change doesn’t happen overnight. It often takes at least several years, or even decades, to gradually replace the old.

However, in the capital markets, things often turn out differently. When people are dazzled by the transformative potential of new technologies, and when news is filled daily with the flashy aspects of new tech—while ignoring the consistent efficiency of old tech (which, indeed, lacks “news value”)—investors tend to become overly optimistic and pay a premium for new technologies.

In fact, if we pay a high premium for a promising new technology and can ensure that all future returns derived from that technology belong to us, the problem becomes smaller (at worst, earning money might just be a bit slower).

But in reality, this high premium faces three main challenges. First, new technologies do not necessarily succeed in application—just think of the early days of hovercrafts. Second, new technologies are rarely monopolized by a single company; fierce competition among firms reduces investment returns. Third, the societal benefits of new technologies may take too long to realize—waiting decades or even longer can drain capital enthusiasm.

All of this explains why the market always overestimates the short-term impact of new technologies and pays too high a price for them. When society becomes better because of technological development, the capital invested in new tech often suffers losses due to excessive enthusiasm.

(Author: Chen Jiahe, Chief Investment Officer of Jiuyuan Qingquan Technology)

(This article reflects only the author’s personal views)

Editor: Liang Qiuyan