What of examples like Enron = where executives obfuscated the records, made millions to billions, then = screwed everyone else when it collapsed? Or the CEOs who inflate the = value, cash out in the stock market, then leave before the company = collapses into ruins in a series of buyouts? In these cases the stock = market and the traders and the collective wisdom are easily fooled, and = get fooled over and over again, at least in the short run. But the way = the stock market works=A0incentivizes these short term illusions because = it creates the ability to get really rich because of them. As stocks = trade faster and easier and information becomes more distant from the = traders this will become more prevalent, or so I believe.

How do we fix that without = removing the collective wisdom evaluation of corporate strategies?=A0 = =A0Though additionally I'll put my faith in a handful of experts over = the collective wisdom any day. I think the collective wisdom lags and = follows those who really understand the companies and technology = anyway.

As = far as short-selling companies who are pursuing the above strategies, I = think that is a good strategy, and I'm sure there are some who do make a = profit doing that... but it requires longer term thinking and longer = term strategies to do so, and the fact that we're moving away that as a = society means that such strategies won't counterbalance the problem.=A0 = =A0Though again the stock market alone isn't the only cause of short = term thinking. I just think it's one piece of the issue, and perhaps one = that could be adjusted to help improve it.

Dave

On Aug 21, 2007, at = 8:44 PM, Daniel Reeves wrote:

Not only do I disagree with Dave, I'll go so far as = to claim he disagrees with his own position.=A0 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?=A0 The market is smarter than we = think.

Nor do I have a beef with day traders.=A0 Either they're providing = valuable information to the market or they're going to get smacked = hard.=A0 (In expectation at = least.)=A0 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).=A0 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.=A0 The stock = price estimates (the per-share net present value of) the cumulative = future cash flow of the company.=A0 = The stock market estimates that better than any other known = mechanism.=A0 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.=A0 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).=A0 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.=A0 It seems = that participation should be optional though.

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

[1] See:
http://freakonomics.blogs.nytimes.com/2007/06/18/hurray-for-hi= gh-gas-prices/
=A0and add to the list that cars = are dangerous to cyclists and skaters!

--- \/ =A0 FROM Dave Morris AT 07.08.20 = 15:21 (Yesterday) =A0 \/ = ---

=
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.=A0 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.=A0 I agree that inheritance = taxes are good as well, to help prevent too many generations of people = staying rich for free.=A0 = 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. =A0 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.=A0 =A0 = 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:=A0 Graham is so right!=A0 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'?").=A0 = 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 =3D stuff you want,
money =3D = 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.=A0 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.=A0= 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
--=A0
http://ai.eecs.umich.edu/= people/dreeves=A0 - = -=A0 search://"Daniel = Reeves"
"Everything that can be invented = has been invented."
=A0-- 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/

--=A0
http://ai.eecs.umich.edu/= people/dreeves=A0 - = -=A0 search://"Daniel = Reeves"

"Try identifying the problem and then solving = it."
=A0 -- suggestion from Dilbert's = boss

Dave = Morris

cell: 734-476-8769

http://www-personal.umich.= edu/~thecat/