The response to the initial public offering last week of shares in LinkedIn, the business social networking company, was euphoric, with the market capitalisation on the first day approaching 40 times revenues. Yet this was modest compared with the earlier IPO of Renren, China’s biggest social networking company, where the initial valuation was closer to 100 times revenues. In the secondary market, meantime, shares of Facebook and its ilk sell on equally fanciful multiples. As in the dotcom boom investors have fallen victim to long-termism, a disease that can be quite as damaging as short-termism to efficient capital allocation – though very good for investment bank profits.

The comparison with the dotcom euphoria is admittedly inexact. It is not possible to have a multitude of social network IPOs because the business tends towards monopoly. Few people want to use a less popular social network, though there is scope for related applications. That means the dispersion of returns may often be very wide between the stratospheric and the non-existent. Along with the uncertainty over business models and the risk that newer technologies may undermine competitive advantage, this makes for extreme volatility in the shares, which is in turn exacerbated by the narrowness of the markets in which they trade.

The other striking feature of the social network IPOs is that the new shareholders have been granted minimal voting rights. Investors are, in effect, buying junk equity, just as they did with the Blackstone IPO that signalled the peak of the private equity boom in 2007. Why, you might ask, are investors going overboard?