Found this article from 2002, originally in a publication called Washington Monthly. It’s still relevant today. Admittedly, the wholesale acceptance of efficient markets theory in the body of the text is a bit questionable, but I liked this quote:
I enjoyed the sight of my fellow students, many of them aspiring Masters of the Universe, squirming in their chairs. But before long I was sharing in their cognitive dissonance. I had come to Columbia to make myself a better financial reporter. What I was learning only reinforced my growing doubts about the intellectual legitimacy of the whole enterprise. If the smartest minds on Wall Street can’t consistently beat the market, how does it help readers to pass along their stock tips?
It’s a weird edifice that has been built. Financial analysts may no longer consistently issue buy recommendations, no matter what the (dot-com) stock, but certainly the emphasis on expected earnings per share and company forecasts is something that has replaced it, in terms of the analyst influence. How many times have I see stocks rise and fall precipitously based solely on what appear to be expectations or disappointment when they remain unfulfilled? The more hyped and reported a stock — the more analyst and, thusly, media coverage — the more volatile its response to these misses (either positive or negative). With the omnipresence of business reporting, financial blogs and innumerable other sources of information and misinformation, this feedback loop obviously has to be taken more and more into account when investing. Gone are the days of a small minority of the country investing and trading on scraps of information, only a few people privy to the full dossier. Nowadays, the real difficulty with investing is filtering out all the noise.
LATER: A case in point.
LATER STILL: Interestingly enough, the article mentions the death of The Industry Standard in the dying days of the dot-com boom. Well, whaddya know, it’s back. Some coverage from the Globe on it; they’ve created a prediction market for technology related news, an area that fascinates me but which I have no facility for, as far as I can tell. There doesn’t appear to be any money at stake, so I’m doubtful of the utility of the site for some kind of “wisdom of the crowds” predictive ability.
I tried a few Intrade wagers during the French election, betting on a longshot Segolene Royal win, but no go. It’s especially interesting to me now that I’ve done a bit of reading on commodity and index futures markets and read a quote in an old book called “The Traders” by Alexander Ross (long out of print; Ross is now dead) that depicts the various personalities in the circa 1984 stock/futures scene, that implied that the futures trader quoted thought futures markets were in fact much more stable in some ways than stock markets, since there were equivalently many shorts as longs in the market and that things like the 1929 crash would not have been precipitated by a lack of buyers. I wonder if the same functioning can occur with futures markets that have the mechanics of Intrade — I haven’t looked at it closely enough but event-based contracts don’t appear to have the same kind of continuity that things like commodities and indices do, as well as going to zero or 100 at a specific point in time.
