X-Spam-Status: No, score=-2.6 required=5.0 tests=BAYES_00 autolearn=ham version=3.2.2 Sender: -2.6 (spamval) -- NONE Return-Path: Received: from newman.eecs.umich.edu (newman.eecs.umich.edu [141.213.4.11]) by boston.eecs.umich.edu (8.12.10/8.13.0) with ESMTP id l7MHpKnd003425 (version=TLSv1/SSLv3 cipher=DHE-RSA-AES256-SHA bits=256 verify=FAIL) for ; Wed, 22 Aug 2007 13:51:20 -0400 Received: from dave.mr.itd.umich.edu (mx.umich.edu [141.211.14.131]) by newman.eecs.umich.edu (8.14.1/8.14.1) with ESMTP id l7MHovvj027665; Wed, 22 Aug 2007 13:50:57 -0400 Received: FROM srvr22.engin.umich.edu (srvr22.engin.umich.edu [141.213.75.21]) BY dave.mr.itd.umich.edu ID 46CC7786.75D86.24817 ; 22 Aug 2007 13:51:02 -0400 Received: from smtp.engin.umich.edu (root Æ smtp.engin.umich.edu [141.213.75.24]) by srvr22.engin.umich.edu (8.13.6/8.13.6) with ESMTP id l7MHp2xR003278 for ; Wed, 22 Aug 2007 13:51:02 -0400 (EDT) Received: from [192.168.2.47] (c-68-43-57-118.hsd1.mi.comcast.net [68.43.57.118]) (authenticated bits=0) by smtp.engin.umich.edu (8.13.6/8.13.6) with ESMTP id l7MHp1Zs011597 for ; Wed, 22 Aug 2007 13:51:01 -0400 (EDT) Message-ID: <46CC7763.5060105 Æ eecs.umich.edu> User-Agent: Thunderbird 2.0.0.6 (Windows/20070728) MIME-Version: 1.0 References: <93EC811F-946D-4EA2-ADE3-5D43B46EA65E Æ umich.edu> <4CE28F9E-2B6E-4834-B3FA-1C3FBF2E7341 Æ umich.edu> <02548635-1F0E-4244-847D-8FA54DACAD4B Æ umich.edu>

In-Reply-To: Content-Type: text/plain; charset=ISO-8859-1; format=flowed Content-Transfer-Encoding: 7bit X-Spam-Checker-Version: SpamAssassin 3.2.2 (2007-07-23) on newman.eecs.umich.edu X-Virus-Scanned: ClamAV version 0.91.1, clamav-milter version 0.91.1 on newman.eecs.umich.edu X-Virus-Status: Clean Date: Wed, 22 Aug 2007 13:50:27 -0400 To: improvetheworld Æ umich.edu From: Matt Rudary Subject: Re: mind the gap Status: O X-Status: X-Keywords: X-UID: 1036 One problem with requiring stock ownership for some amount of time is that it prevents short selling. If I believe that the company is less valuable than public perception (i.e. the stock price), then there is no way for me to affect the price unless I already hold stock. It seems to me that this would cause stock prices to become artificially inflated. Matt Dave Morris wrote: > True- any change should be implemented only incrementally, with concrete > metrics to measure progress or not, and metrics of other effects which > may not have been intended as well. This would be hard to experiment > with, as many other factors influence things as well. > > But what do you think of the change which recently occurred- moving to > computer based trading instead of paper trading, which essentially sped > things up. They now have in place mechanisms which detect rapid drops in > the market, caused by computer agents responding to each other causing > crashes faster than humans could intervene, and now an automated system > puts a pause in place when this starts to occur. So we have already > slowed down the stock market in one regard. > > What do you think the impact would be if we slowed it down a little bit > more? Required stock ownership for a day? A month? A year? What other > mechanisms besides requiring that you hold a stock for a specified > amount of time would work? It seems like it would be difficult to limit > volume of trading with large investment companies trading for millions > of people as they do. > > > If you had to invest for at least a year, I imagine that it would slow > things down considerably. Stock values wouldn't change as quickly, and > the market would be slower to understand/figure out failures in > companies. On the one hand this would remove short term > response/motivation to company leaders when the market disapproved of > their strategies, which could be devastating if the market really is > driving CEOs to decide how to run things on that scale. But then it > might also be wiser about short term strategies versus long term gains > and force CEOs to think a year or two in advance instead of just about > the next quarter. I wonder what the real impact would be. > > Dave > > On Aug 22, 2007, at 12:18 PM, Kevin Lochner wrote: > >> As daniel has pointed out, the market is not perfect. A tempting >> conclusion to draw from that observation is "ok, let's fix it". I >> think there is reason for restraint. >> >> As the other students of economics should agree, there are cases where >> you can't explicitly determine the outcome of production & allocation >> and simultaneously have proper incentives for everyone in society. >> This doesn't necessarily preclude a "fix" to markets, but it indicates >> that getting to a "better" outcome is possibly harder than we >> imagine. So maybe you come up with a rule that "fixes" the instances >> of small company buyouts, but maybe that imposes other costs on the >> market and society that outweigh the gains. By analogy, I don't like >> getting dust in my eye, but that doesn't motivate me to wear >> protective goggles all day. >> >> It's easy to measure the tradeoff for such mundane cases, but the >> issue is much more subtle in the context of the global economy. Given >> that each new regulation imposes some cost with respect to compliance >> while inherently limiting individual freedom, my position is that we >> should err on the side of free markets (and more generally, freedom) >> unless the case for regulation is compelling. Examples of regulation >> gone awry include our disaster of a tax code and the >> criminalization of drug use. Once imposed, such regulation is not >> quickly nor easily revoked. >> >> - k >> >> >> On Wed, 22 Aug 2007, Dave Morris wrote: >> >>> That's a good point- if it's already criminal, we've done what we can >>> to correct it, which ideally solves the Enron case. >>> >>> The real problem is in the case where what the evil CEO is doing is >>> legal. Like taking a small not for profit company for profit and >>> making a ton off the stock sales selling it to a big company that >>> wrecks it. The small company looks good on the stock market >>> temporarily, and the big company looks good temporarily for buying >>> it, but when the big company strategy ruins the value of the small >>> company everything is lost in the long run. But that happens 5 years >>> later, so short selling over that period is impractical, or just not >>> the norm, for most investors, so the market doesn't seem to correct >>> for it. >>> >>> Any suggestions or counter arguments for that example? >>> >>> >>> On Aug 22, 2007, at 10:31 AM, Yevgeniy Vorobeychik wrote: >>> >>>> I think the argument to the "evil CEO" examples would run as >>>> follows. Suppose that CEO does something that he knows will cause >>>> the company's imminent collapse. Naturally, he's the only one who >>>> knows this. The problem with the reasoning below is the implicit >>>> assumption that the CEO will not play the stock market. But in >>>> theory, the CEO should short cell shares until the price comes down >>>> to roughly what he/she expects it to be. In the end, he'll make >>>> additional billions of dollars, while the market price will >>>> accurately forcast imminent collapse. That would be the theory. In >>>> reality, something seems to prevent a CEO from doing just that (at >>>> least conspicuously). One would be the laws against insider >>>> trading. Another would be that he is in effect giving evidence to >>>> his own wrongdoing. There is also the issue of transaction costs, >>>> but that's probably more minor here. >>>> I think the problem of "evil CEO" is really entirely separate from >>>> that of stock market inaccuracy. If the CEO is indeed evil, you >>>> certainly to want to create additional incentives for wrongdoing by >>>> creating another opportunity for them to cash in. The issue may be >>>> insufficient enforcement of accounting crimes, etc. on the part of >>>> company executives. That's where the incentives really need to be to >>>> "behave". >>>> On Wed, 22 Aug 2007, Dave Morris wrote: >>>>> You point out some potential benefits, and others have pointed out >>>>> specific examples. I agree with these, but my argument is not that >>>>> the stock market should be abolished. It does provide value. My >>>>> argument is that it's got flaws that are getting worse, and thus >>>>> should be recognized. >>>>> 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 incentivizes 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? Though 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. Though 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. 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 >>>>> Dave Morris >>>>> cell: 734-476-8769 >>>>> http://www-personal.umich.edu/~thecat/ >>> >>> Dave Morris >>> cell: 734-476-8769 >>> http://www-personal.umich.edu/~thecat/ >>> >>> >> >> > > Dave Morris > cell: 734-476-8769 > http://www-personal.umich.edu/~thecat/ > >