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rffrydr
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rffrydr
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 Posted: Thu Nov 26, 2009 6:06 pm Post subject: |
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M&A, now there's a market:
| Quote: | M&A bankers are spending a lot of time watching shadows at the moment.
Mention a potential deal in passing – based on nothing but an analyst’s suggestion – and suddenly those shadows are given form. Take the trading frenzy around Colgate-Palmolive and Reckitt Benckiser. |
http://www.ft.com/cms/s/fbf0e246-d787-11de-b578-00144feabdc0.html
Where's there's a rhyme there's a reason--and "rationality" has nothing to do with. Even it's opposite  This is the radical part of Soros's "Reflexivity."
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rffrydr
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| Posted: Wed Nov 04, 2009 3:50 pm Post subject: |
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Markets are many things--and always a balance:
Chaotic evolution defines the market economy
By John Kay
Published: November 4 2009 02:00 | Last updated: November 4 2009 02:00
The fall of the Berlin Wall in November 1989 was the defining economic event of our lifetime. It marked the end of the largest controlled experiment in the history of social sciences - the division of Germany into two economic zones, one centralised and planned, the other a market economy. After 40 years, the gap in living standards between the two was so extreme that the experiment terminated.
But why? A popular caricature of the market economy sees greed as the dominant human motivation. Economic progress is best achieved by acknowledging that reality and imposing as few restrictions as possible. This is the economy of Nigeria and Haiti, and it does not work. It is also the commercial environment of the Ik mountain people described by anthropologist Colin Turnbull, and Lehman Brothers as written up by former vice-president Lawrence McDonald. It did not work in these cases either.
A more thoughtful account of the success of markets has three elements. Prices act as signals - the price mechanism is a guide to resource allocation rather than central planning. Markets are a process of discovery - an economy adapts to change through a chaotic process of experimentation. The third element is the capacity of the market to bring about diffusion of political and economic power. This is the most effective way to protect society from rent-seeking - a culture in which the principal route to wealth is not creating wealth, but attaching oneself to wealth created by others.
Modern economics and economic policy put too much emphasis on the first of these elements. But the second and third are probably more important. The result is that both supporters and critics of the market economy confuse policies that are pro-business with policies that are pro-market. That confusion has undermined the social and political legitimacy of the market economy, and has led to serious policy errors.
Friedrich von Hayek is the most eloquent expositor of the market as a process of discovery. His argument was a priori , but vindicated by events. From the failures of the eastern bloc in the postwar era, we now have clearer evidence of how these planned economies failed in the development, not just of consumer products, but in business methods and in almost all areas of applied technology not related to military hardware.
Centralised systems experiment too little. They find reasons why new proposals will fail - and mostly they are right. But market economies thrive on a continued supply of unreasonable optimism. And when, occasionally, experiments succeed, they are quickly imitated.
If market economies are better at originating and diffusing new ideas, they are also better at disposing of failed ones. Honest feedback is not welcome in large bureaucracies, as the UK government's drug advisers can testify. In authoritarian regimes, such reporting can be fatal to the person who delivers it.
Disruptive innovations most often come to market through new entrants. The health of the market economy depends on constant replenishment of ideas, often from unpredicted sources. If you had been planning the future of the computer industry in the 1970s, would you have asked Bill Gates and Paul Allen? If you had been planning the future of European aviation in the 1980s, would you have asked Michael O'Leary or Stelios Haji-Ioannou? If you had been planning the future of retailing in the 1990s would you have asked Jeff Bezos? Of course not: members of the politburo, cabinet or large company board would have consulted grey men in suits like themselves.
Markets are not a well-oiled machine: they are a constantly changing, adaptive biological system. Pluralism is their motive force, their essence chaotic, their development inherently uncertain. If we could predict the evolution of markets, we would not need markets in the first place. Next week, I will review the other part of the market story - barriers to rent-seeking. This column is based on John Kay's Wincott lecture
johnkay@johnkay.com
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rffrydr
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| Posted: Fri Oct 30, 2009 10:30 am Post subject: |
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Saudis had enough of the WTI contract and will price basis GulfOil come January.
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rffrydr
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| Posted: Sun Sep 27, 2009 9:43 am Post subject: |
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Some markets thrive on irrationality:
http://tinyurl.com/ydkbll9
PS watch for money laundering logic in Russian buy of Nyets.
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rffrydr
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rffrydr
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| Posted: Mon Aug 31, 2009 12:49 pm Post subject: |
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Self-generating "free trade" tax:
30 Aug 2009 7:39pm
Tony Jackson: Individual rationality can mean collective irrationality
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Now that even the UK's chief financial regulator has started kicking the theory of efficient markets, the fun has gone out of it somehow. Moderation in all things: and it is worth remarking that just because markets are inefficient, that need not mean investors are irrational.
The point is contentious, and needs defending. As it happens, I have come across an academic paper which does just that. But first, an observation.
Some economists insist that markets must be efficient because they are rational. And if they are not rational, the whole of economic theory collapses.
So be it, we might reply. Better no theory than a dud one. And other theories, based on behaviour rather than rationality, do a better job.
But when it comes to the big stuff, our actions belie that. When we are grappling with the subprime debacle or Chinese economic policy, we ask ourselves what people are up to – not how they behave, but how they are reasoning.
In fact, the theory of rational behaviour is a model – a schematic attempt to portray the big picture. Any such model, in or out of economics, contains anomalies. To dwell on those anomalies, as we all now enjoy doing, risks missing the point. It is only when there are enough of them that the model is more hindrance than help and must be dumped.
So to the paper, by two academics from the London School of Economics – former hedge fund manager Paul Woolley and Professor Dimitri Vayanos. In effect, they argue that markets are inefficient for perfectly rational reasons.
The key lies in the use of agents. Conventional economic theory deals with representative individuals. But in reality, those individuals generally hand their savings to institutions, who hand them on to specialist fund managers.
If those managers underperform the market, it is hard for the investor to know whether they are deliberately avoiding overvalued stocks, or simply messing up. If the situation persists, then investors infer the latter and switch their money.
The germ of the idea came to Dr Woolley a decade ago, he says, when he was running the European end of the US hedge fund GMO. The fund relied on fundamental value during the dotcom boom, when high-tech, telecom and media stocks became grossly overvalued. GMO initially shunned them, thereby underperforming hugely, and by the peak of the frenzy had lost 40 per cent of its funds under management. Until the tide turned, the only way it could stem the flow was to devote part of its funds (and the bulk of its trading) to momentum plays – that is, to the overvalued stuff.
The concept of momentum is important because efficient market theory says it should not exist. If investors decide a stock or sector is worth a price different from the present one, they should move to that price immediately.
In reality, of course, prices overshoot over long periods, then go into reverse. The dotcom example illustrates why.
As investors were bailing out of value funds such as GMO, they were gradually switching more cash into the bubble stocks. Thus those stocks were pushed up and value stocks pushed down. Why gradually? Because it takes time to sack a fund manager and because individual investors capitulate at different levels.
In a sense, this is not new. I myself have banged on for years about how fundamental value is in practice irrelevant, since fund managers who stick to the fundamentals risk losing their jobs.
But I had rather assumed that was because end-investors were behaving irrationally. This thesis suggest otherwise.
The information gap between them and their agents means they are making the best of the knowledge available to them. So it turns out that individually rational actions add up to a collectively irrational outcome. That might seem odd to mainstream economists, but not to the rest of us. Mutually destructive wars have been fought on the same basis.
What are we to do about this? Unstable and irrational markets can be socially harmful, besides wasting resources within the financial system.
Dr Woolley hopes the very fact of pointing this out will help investors to concentrate more on the long term. Failing that – and it seems a long shot – he suggests regulatory intervention.
The aim would be to reduce market turnover – perhaps through a kind of Tobin tax. This brings us back to Lord Turner, whose related suggestion caused such a furore last week.
That too is perfectly rational, since market participants are defending practices on which their livelihood depends. If the rest of us want a less irrational outcome, we must look to ourselves to make it happen. |
tony.jackson@ft.com
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rffrydr
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| Posted: Mon Aug 31, 2009 12:42 pm Post subject: |
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"Myths and the Rational Market":
Magic and the myth of the rational market
By Keir Martin
Published: August 24 2009 21:57 | Last updated: August 24 2009 21:57
| Quote: |
“If they see me planting too much cocoa, they’ll do things to my land and my family, and they won’t bear fruit; really bad things; puripuri and other witchcraft.”
This was how Peter explained to me why he had only cultivated half of the three-hectare block the Papua New Guinean government had given him after he was evacuated from his home during a volcanic eruption eight years earlier. He was also providing a response to an accusation I had often heard levelled at his fellow villagers by government officials and development workers in the course of my anthropological field research: that the people were lazy or stupid because, like Peter, none had planted the whole of their blocks of land.
Such an avoidance of profit maximisation might have appeared economically irrational. But from the perspective of those villagers, putting in extra work just to make oneself a target for the jealousy of one’s neighbours would be highly irrational behaviour.
Critics of untrammelled free markets have long attacked the assumption that markets are rational, driven by rational self-interested economic actors. But the question of economic rationality has returned with a vengeance in the wake of the current crisis.
Both advocates and critics of the rational economic actor model are usually keen to stress that it is a rationality that measures economic value and does not take into account the social setting. Yet, field research clearly shows that the actions of individuals vary massively depending on social context.
Living in Papua New Guinea, one is struck by the resources expended on gigantic ceremonial gift exchanges. The “big men” running such systems did not call in debts to maximise the number of pigs or modern wealth items such as money or trucks in their possession. But academics continued to assume that the aim was to profit over the long term, with the discrepancy between this assumption and the big men’s actual activities being explained as the result of “selective amnesia”. It was only when the assumption of economic rationality was dropped that it was possible to understand the big men in their own terms. Their aim was to increase the number of those dependent upon them, and so, like a Mafia godfather, their aim was to create debts that would never be repaid. Like Mafiosi, their actions were neither the result of what one economist described as “an inferior mentality”, or a lack of rationality. They were entirely rational within a context in which building up an army of followers was at times a more pressing demand than stockpiling wealth objects.
One response to the current crisis has been a rise in the popularity of behavioural economics, which examines the psychological and emotional factors behind transactions. These models drop the assumption of the rational actor yet implicitly keep the same model of economic rationality at their heart. We may diverge from the path of rationality for all sorts of psychological reasons but only because emotion, Keynes’s famous “animal spirits”, clouds our judgment.
Clearly the stress, fear and excitement that run through investors’ nervous systems can have as strong an impact on their investment choices as they can on gamblers caught up in the enthusiasm of a race meeting. But it is also important to remember that rationality can often be a matter of perspective and context. From a theoretical perspective it may be irrational to sell an investment for less than its true value. But, if everyone else is selling, are you going to risk your job as a professional investor holding on to those securities?
That sell decision is as rational in a Wall Street context as the Papua New Guinean’s decision not to maximise the returns from his block of land are in his, even if in the long term your interests may be better served by holding on to those securities.
At certain points the interests of individual investors, investment funds and the market as a whole may coincide. At such points reaching a consensus on what is rational is rather easy. At other times, however, they will diverge. In such contexts, rather than assuming that non-textbook behaviour is the result of a fall from rationality, our understanding of how markets work may be better served by an examination of how different measures of rationality emerge in different contexts, and how to manage them when they come into conflict. |
The writer is a lecturer in social anthropology at Manchester University
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rffrydr
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| Posted: Fri Aug 21, 2009 9:27 am Post subject: |
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GM thrashing about like a rabid gorilla in a demilitarized zone which no-one has the authority to just shoot. Bad for the "markets", bad for the investor, bad for Govt. 
http://www.detnews.com/article/20090821/AUTO01/908210404/1148/rss25
Wonder what it'll do for the legal system?
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| Posted: Thu Aug 06, 2009 7:55 pm Post subject: |
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"The Price is Not Always Right"
The price is not always right and markets can be wrong
By Richard Thaler
Published: August 5 2009 03:00 | Last updated: August 5 2009 03:00
Irecently had the pleasure of reading Justin Fox's new book The Myth of the Rational Market . It offers an engaging history of the research that has come to be called the "efficient market hypothesis". It is similar in style to the classic by the late Peter Bernstein, Against the Gods . All the quotes in this column are taken from it. The book was mostly written before the financial crisis. However, it is natural to ask if the experiences over the last year should change our view of the EMH.
It helps to start with a quick review of rational finance. Modern finance began in the 1950s when many of the great economists of the second half of the 20th century began their careers. The previous generation of economists, such as John Maynard Keynes, were less formal in their writing and less tied to rationality as their underlying tool. This is no accident. As economics began to stress mathematical models, economists found that the simplest models to solve were those that assumed everyone in the economy was rational. This is similar to doing physics without bothering with the messy bits caused by friction. Modern finance followed this trend.
From the starting point of rational investors came the idea of the efficient market hypothesis, a theory first elucidated by my colleague and golfing buddy Gene Fama. The EMH has two components that I call "The Price is Right" and "No Free Lunch". The price is right principle says asset prices will, to use Mr Fama's words "fully reflect" available information, and thus "provide accurate signals for resource allocation". The no free lunch principle is that market prices are impossible to predict and so it is hard for any investor to beat the market after taking risk into account.
For many years the EMH was "taken as a fact of life" by economists, as Michael Jensen, a Harvard professor, put it, but the evidence for the price is right component was always hard to assess. Some economists took the fact that prices were unpredictable to infer that prices were in fact "right". However, as early as 1984 Robert Shiller, the economist, correctly and boldly called this "one of the most remarkable errors in the history of economic thought". The reason this is an error is that prices can be unpredictable and still wrong; the difference between the random walk fluctuations of correct asset prices and the unpredictable wanderings of a drunk are not discernable.
Tests of this component of EMH are made difficult by what Mr Fama calls the "joint hypothesis problem". Simply put, it is hard to reject the claim that prices are right unless you have a theory of how prices are supposed to behave. However, the joint hypothesis problem can be avoided in a few special cases. For example, stock market observers - as early as Benjamin Graham in the 1930s - noted the odd fact that the prices of closed-end mutual funds (whose funds are traded on stock exchanges rather than redeemed for cash) are often different from the value of the shares they own. This violates the basic building block of finance - the law of one price - and does not depend on any pricing model. During the technology bubble other violations of this law were observed. When 3Com, the technology company, spun off its Palm unit, only 5 per cent of the Palm shares were sold; the rest went to 3Com shareholders. Each shareholder got 1.5 shares of Palm. It does not take an economist to see that in a rational world the price of 3Com would have to be greater than 1.5 times the share of Palm, but for months this simple bit of arithmetic was violated. The stock market put a negative value on the shares of 3Com, less its interest in Palm. Really.
Compared to the price is right component, the no free lunch aspect of the EMH has fared better. Mr Jensen's doctoral thesis published in 1968 set the right tone when he found that, as a group, mutual fund managers could not outperform the market. There have been dozens of studies since then, but the basic conclusion is the same. Although there are some anomalies, the market seems hard to beat. That does not prevent people from trying. For years people predictedfees paid to money managers would fall as investors switched to index funds or cheaper passive strategies, but instead assets were directed to hedge funds that charge very high fees.
Now, a year into the crisis, where has it left the advocates of the EMH? First, some good news. If anything, our respect for the no free lunch component should have risen. The reason is related to the joint hypothesis problem. Many investment strategies that seemed to be beating the market were not doing so once the true measure of risk was considered. Even Alan Greenspan, the former Federal Reserve chairman, has admitted that investors were fooled about the risks of mortgage-backed securities.
On the free lunch component there are two lessons. The first is that many investments have risks that are more correlated than they appear. The second is that high returns that are based on high leverage may be a mirage. One would think rational investors would have learnt this from the fall of Long Term Capital Management, when both problems were evident, but the lure of seemingly high returns is hard to resist.
The bad news for EMH lovers is that the price is right component is in more trouble than ever. Fischer Black (of Black-Scholes fame) once defined a market as efficient if its prices were "within a factor of 2 of value" and he opined that by this (rather loose) definition "almost all markets are efficient almost all the time". Sadly Black died in 1996 but if had lived to see the technology bubble and the bubbles in housing and mortgages he might have amended his standard to a factor of three. Of course, no one can prove that any of these markets were bubbles. But the price of real estate in places such as Phoenix and Las Vegas seemed like bubbles at the time. This does not mean it was possible to make money from this insight. Lunches are still not free. Shorting internet stocks or Las Vegas real estate two years before the peak was a good recipe for bankruptcy, and no one has yet found a way to predict the end of a bubble.
So where does this leave us? Counting the earlier bubble in Japanese real estate, we have now had three enormous price distortions in recent memory. They led to misallocations of resources measured in the trillions and in the latest bubble, a global credit meltdown. If asset prices could be relied upon to always be "right", then these bubbles would not occur. But they have, so what are we to do?
While imperfect, financial markets are still the best way to allocate capital. Even so, knowing that prices can be wrong suggests that governments could usefully adopt automatic stabilising activity, such as linking the down-payment for mortgages to a measure of real estate frothiness or ensuring that bank reserve requirements are set dynamically according to market conditions. After all, the market price is not always right.
The writer is a professor of economics and behavioural science at the University of Chicago Booth School of Business and the co-author of Nudge
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