Re: Market efficiency: good or bad?

Christopher Maloney (
Fri, 02 Jul 1999 16:22:35 -0400

Sending this again ... sorry if it gets duplicated, I don't know what the deal is. I've waited 16 hrs and it didn't show up.

Eliezer S. Yudkowsky wrote:
> 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".

Yes, so in what way is this "no stock market whatsoever"? As you allude to below, this is *exactly* a stock market. Unless you're suggesting that you wouldn't have the right to turn around and sell your right to a percentage of the dividends.

> 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.

No this won't work. Very interesting reading, though. But it seems clear to me that the market value of a stock is determined by a simple formula of supply and demand, and I can't see how your suggestion would affect that, or what incentive people would have for opting for your "casinos", instead of the real market.

What we have now is a vast pyramid scheme, which has not yet collapsed. The value of the stocks continues to climb because each buyer is borrowing against the future, betting that she can get out with her dough before the whole thing folds. I can't see how any casino that you devise could have that kind of indefinite ability to ride up the values. A casino is definitely a zero-sum game in the short term. As you pointed out, (2) and (3) are also zero-sum games, but *in the long term*. For now, and probably for several more years, everyone can expect to win!

What really scares me is the government's toying with the idea of investing the Social Security trust fund in the stock market. Not that I expect to ever see a dime of SS. But, clearly, I do expect to see the whole stock market come to a devastating crash at some point when a good percentage of the baby-boomers retire, and start cashing in. I don't see an easy solution though. As long as the market is free, nobody can stop someone from paying ridiculous prices for a stock.

> 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.

Are you joking?

> 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

Chris Maloney

"Knowledge is good"
-- Emil Faber