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Date: Tue, 21 Aug 2007 20:44:24 -0400 (EDT)
To: Dave Morris <thecat &AElig umich.edu>
cc: improvetheworld &AElig umich.edu, steven &AElig aptigi.com, reeves-hayos &AElig umich.edu,         reeves-kalkman &AElig umich.edu
From: Daniel Reeves <dreeves &AElig umich.edu>
Subject: Re: mind the gap
Status: O

Not only do I disagree with Dave, I'll go so far as to claim he disagrees 
with his own position.  If not, Dave, why not make a killing shorting 
stock of the next company to do a round of layoffs for the sake of a short 
term boost in stock price?  The market is smarter than we think.

Nor do I have a beef with day traders.  Either they're providing valuable 
information to the market or they're going to get smacked hard.  (In 
expectation at least.)  In any case, they're paying a fair rate for the 
money they borrow and no matter how little time they own a stock they are, 
in aggregate, contributing to the investment in those companies. (And 
short-selling is just borrowing stock, later buying it to pay back the 
loan, so nothing slimy about that, contrary to popular conception.)

I used to be like Dave, pointing to a litany of "obvious" flaws in the 
market (stock market or "the market" more generally, like microsoft being 
sucky (for me) yet rich).  But the market had a habit of being smarter 
than me and I've learned some humility in this regard.

As for Dave's specific allegation (the stock market focuses on short term 
gains), I don't think that's true.  The stock price estimates (the 
per-share net present value of) the cumulative future cash flow of the 
company.  The stock market estimates that better than any other known 
mechanism.  It is of course prone to fits of hysteria but when it does 
it's taking a very *long term* (fantasy) view.

That said, there are cases where markets fail and that is in the face of 
externalities. A classic example of an externality is the Tragedy of the 
Commons in which a bunch of farmers ruin a common grazing field because no 
one person has incentive to ration their use of it if no one else is. 
It's analogous to traffic congestion which is one of several reasons we 
need higher taxes (gas, roads) on driving. [1]

The need to tax pollution is another classic example.

Eugene's Starving Artist is an interesting example of a possible market 
failure.  That might be explained in terms of externalities (positive this 
time) if the art was of a kind that couldn't be charged for by usage 
(public sculpture perhaps).  In other words, you have free-riders.

Eugene's Down On Their Luck example I believe is an argument for risk 
pooling, one form of which is the "social safety net", ie, welfare.  It 
seems that participation should be optional though.

Clare's Parasite CEO example I'm still thinking about...

Danny

[1] See:
http://freakonomics.blogs.nytimes.com/2007/06/18/hurray-for-high-gas-prices/
  and add to the list that cars are dangerous to cyclists and skaters!


--- \/   FROM Dave Morris AT 07.08.20 15:21 (Yesterday)   \/ ---

> I'll rephrase my claim:
> "Playing the stock market with the objective of short term gains does not 
> contribute to society, and in fact actively harms it."
> But I do think that is true. The stock market has some benefits, and there 
> are good reasons to have such a thing around, but ours needs help.
>
> Stock prices can be a measurement of a companies performance, but it can too 
> easily be influenced in the short term for short term reasons. I feel like it 
> has become common for companies to trim benefits packages, switch CEOs, cut 
> R&D, and do other things which provide a benefit the company for one quarter, 
> and thus make the stock market evaluation bounce when their profits look good 
> for a moment, but which have serious long term costs. The CEOs in charge, and 
> the investors, like this strategy because they can profit from it, then get 
> out before the stock goes down again in the long run.
>
>
> Many people lose from this- not only those holding the stocks when the 
> company goes down in general, but the employees of the company, and those 
> using the services of the company. The stock market encourages short term 
> thinking for short term gain and our country has become swept up in this. I 
> personally know people who have had their companies destroyed this way. I 
> feel like people invest not so much with an idea for building long term 
> stability and high probability of reasonable returns, but as more of a get 
> rich quick theme. And furthermore computer trading and other features have 
> made it easier to trade shorter and shorter term with little understanding or 
> analysis of the companies involved. So stock values become influenced by more 
> trivial surface things, because that's all these day traders have time to 
> see. So now companies are making trivial surface changes to satisfy the whim 
> of short term investors, at long term cost.
>
> There was a big discussion on NPR about hedge funds, stock market trading of 
> mortgages, and how it led to the creation of, and current bursting of, the 
> housing market bubble. Part of the problem was that stock market investing 
> had become too disassociated from the things being invested in and the real 
> long term values thereof.
>
> Meanwhile most people, who work for the companies thus traded, suffer. 
> Ironically it's their own investment in stock market based IRAs that helps 
> drive the process.
>
> So I would argue that the system needs to change. Not that we need to get rid 
> of the stock market entirely, but that we need to shift the way it works to 
> put the focus back on valuing companies that have good long term strategies, 
> and less on valuing get rich quick schemes. What if you had to own a stock 
> for at least a month before you could resell it? Or a week? Or a year? I'm 
> not sure where the right number would be, but it really seems to me that 
> traders who sign on in the morning, borrow $10M from a bank, trade all day 
> back and forth, return the $10M at the end of the day having made $100k, they 
> aren't really helping society, and could be actually harming it in some real 
> and significant ways.
>
> Of course part of this also is changing the attitudes of people and whether 
> they should be looking to get rich quick at any expense, or whether they 
> should be looking to help themselves, and incidentally also society, in the 
> long run. But from a top down approach at least we can put in mechanisms that 
> are designed to encourage the latter instead of the former. We can't force 
> anything, and I wouldn't want that level of government control, but right now 
> I feel like we strong encouragements to the opposite of what we want.
>
> In the meantime I'll make sure that my company is never publicly traded so I 
> don't have to worry about it. :-)
>
> Dave
>
>
>
>
> On Aug 20, 2007, at 1:29 PM, Kevin Lochner wrote:
>
>> 
>> I have to take issue with Dave Morris re: "Playing the stock market does 
>> not contribute to society."
>> 
>> Not only does a company's stock price influence its access to capital, but 
>> the respective stock prices of all companies provide information about the 
>> state of the economy that a ceo or entrepeneur may use in making strategic 
>> corporate decisions.  Stock prices are determined primarily by people who 
>> are "playing the stock market".
>> 
>> 
>> 
>> Investing in new companies does. It's a fine line, but
>>> I think we've gotten too much separation of rich and poor in our society 
>>> because of the way our stock market currently operates, and that could use 
>>> some correction.  I agree that inheritance taxes are good as well, to help 
>>> prevent too many generations of people staying rich for free.  But we 
>>> should try to reign in the various tricks which exist to leverage large 
>>> sums of cash into even larger sums via short term tricks in business and 
>>> stocks without actually contributing anything.   Not only do they take 
>>> funds from people with less, they hurt the country overall.
>>> 
>>> But he is also correct- there's a wide variance of skill and motivation in 
>>> people, so there should be a wide variance in income levels. I'd accept a 
>>> factor of 100 variance from top to bottom in salary as a reasonable 
>>> maximum in relative value to society that a person could be. Some people 
>>> bust their asses continuously to help the world. Some people actively try 
>>> to live off of others without contributing anything.    I do have a 
>>> problem with the factor of 1000 or 10000 variances that sometimes occur, 
>>> but those are obvious flaws that are difficult to correct.
>>> 
>>> Interesting to consider. :-)
>>> 
>>> Dave
>>> 
>>> On Aug 20, 2007, at 10:16 AM, Daniel Reeves wrote:
>>> 
>>>> We've been debating this essay
>>>> http://www.paulgraham.com/gap.html
>>>> and I thought I'd move it to improvetheworld...
>>>> I'll start:  Graham is so right!  The income gap between the rich and the 
>>>> poor is wonderful!
>>>> Actually it started more as a debate about the nature of capitalism and 
>>>> interest ("why should money 'grow'?").  Here was the gist:
>>>> * [the economy] is a zero-sum game, isn't it?
>>>> - no
>>>> * those earning money are taking it away, even if only indirectly, from
>>>> other people, no?
>>>> - no, not if you think in terms of wealth (wealth = stuff you want,
>>>> money = way to transfer wealth)
>>>> * Or am I totally simplifying the haves vs. the have-nots with my pie
>>>> metaphor?
>>>> - yes, that's precisely the Daddy Model of Wealth!
>>>> * Is it THEORETICALLY possible for no one to owe any money at all in this
>>>> world, i.e., that everyone just has money that "grows"? Or does money
>>>> only grow if it is taken away from others?
>>>> - You're right, not possible, but for the opposite reason of what you 
>>>> seem
>>>> to be suggesting.  You grow money by giving it to someone (lending it),
>>>> not by taking it away.
>>>> It even got a bit heated, along the lines of "Trixie, I don't think it's 
>>>> right for you to lash out against capitalistic/yootlicious ideas without 
>>>> grokking the answers to your questions [above]".
>>>> Oh, and I offered a yootle to the first person who could answer the 
>>>> quasiphilosophical question why money *should* grow, with the hint that 
>>>> it has to do with human mortality.  I believe that's the only reason that 
>>>> holds in all circumstances.
>>>> In any case, Trixie wanted to resume the debate and this is clearly the 
>>>> place to do it!
>>>> DO NOT CHANGE THE SUBJECT LINE WHEN YOU REPLY (so it's easy for those not 
>>>> interested in this debate to delete the whole thread).
>>>> Ok, go!
>>>> Danny
>>>> -- 
>>>> http://ai.eecs.umich.edu/people/dreeves  - -  search://"Daniel Reeves"
>>>> "Everything that can be invented has been invented."
>>>>  -- Charles H. Duell, Commissioner, U.S. Office of Patents, 1899.
>>> 
>>> Dave Morris
>>> cell: 734-476-8769
>>> http://www-personal.umich.edu/~thecat/
>>> 
>>> 
>> 
>> 
>
> Dave Morris
> cell: 734-476-8769
> http://www-personal.umich.edu/~thecat/
>
>

-- 
http://ai.eecs.umich.edu/people/dreeves  - -  search://"Daniel Reeves"

"Try identifying the problem and then solving it."
   -- suggestion from Dilbert's boss