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Date: Wed, 22 Aug 2007 13:50:27 -0400
From: Matt Rudary
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To: improvetheworld Æ umich.edu
Subject: Re: mind the gap
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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-p...
>>>>>> 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/
>
>
|
