Re: Market efficiency: good or bad?

Eliezer S. Yudkowsky (
Thu, 01 Jul 1999 02:07:15 -0500

Brian Atkins wrote:
> Are you saying the "market efficiency", helped by day traders,
> is a bad thing?

Yep. You've got people buying a stock because they think other people will buy the stock because other people... it doesn't ground. You've got massive, volatile, pointless movements materializing out of nowhere. What I'm saying is that people who want to bet on stocks should bet on stocks, and people who want to give money to people who can use it to make more money, should give money to people who can use it to make more money. The "growth stock" is a cruel joke that will eventually be the downfall of Western Civilization if Zyvex and I don't get to it first. You can quote me on it.

A high-computing-power capitalist economy can get along perfectly fine even if there is no stock market whatsoever. I give money to someone, they use it to build a new manufacturing plant, and in exchange I get a percentage of the dividends from that plant - that's my "stock". When the manufacturing plant shuts down, the dividends stop. If they managed to generate enough revenue, I make a profit. If not, not. No information loss, and when I want my money to make money, I actually give it to people who will use it to make money, not to the previous investor who buys a speedboat.

In practice, you would quickly get a market in stocks, and people would buy stocks from one another based on how they think the future is going to work out, and eventually you would get people buying "growth stocks" again. I'm just pointing out that shuttling all the day traders into actual casinos isn't going to hurt the economy. Nor would creating an enormously higher rate of actual capital investment (so that the money now flooding into the stock market would go to buy actual machinery instead of speedboats) kill the market by flooding it with new stocks.

In other words, there are three elements in the modern market:

  1. The person with money, who wants to turn that money into more money, by giving it to someone who will produce wealth. Presently filled by venture capitalists.
  2. The person who thinks he sees a piece of property, such as the right to receive a certain percentage of dividends, which is undervalued. Presently filled by small investors.
  3. People who think they know which way the market will go and are willing to bet on it. Presently filled by day traders.

Right now, the stock market is a mess. The first problem is that most small investors want to do (1), a positive-sum game, but are stuck with (2), a zero-sum game; and the second problem is that the people doing (3), a _highly volatile_, mathematically chaotic zero-sum game, are forced to buy actual stocks in the same market as (1) and (2).

What we need is, (a) actual market-gambling casinos; (b) some way for small guys to join venture-capital cooperatives. That'll go a *long* way towards untangling the unholy mess.

I'm not suggesting any form of government mandate; I think that the natural efficiencies of doing The Right Thing will attract people into separate markets along the lines I suggest. If said markets were legal and available.

Once again: Almost all really complicated economic problems are the results of combining multiple functions into a monolithic object.

> "Eliezer S. Yudkowsky" wrote:
> >
> > Oh, yes, and did I mention that letting people just bet, outright, on
> > which way a stock will go, without actually having to buy anything and
> > with no brokerage commission, would probably go a long way towards
> > stabilizing the stock market?
Which, if you ask me, has major
> > volatility problems stemming from people out to make a fast buck.
> > Remove the people who aren't actually investors, and the market will
> > probably get a lot better.
> >
> > Even major institutions sometimes buy futures or stocks as a hedge,
> > instead of as an investment. In a horse-race-like scenario, you could
> > probably get much better odds on hedges.

           Eliezer S. Yudkowsky
Running on BeOS           Typing in Dvorak          Programming with Patterns
Voting for Libertarians   Heading for Singularity   There Is A Better Way