Contrast : TheWisdomOfCrowds, Read With : and http://blahsploitation.blogspot.com/2008/10/oli-had-couple-of-good-replies-to-my.html and VirginiaPostrel on ExperimentalEconomics discovering the inevitability of FinancialBubbles : http://www.theatlantic.com/doc/print/200812/financial-bubbles
Normally I think of markets as information processing engines.
But here I want to talk about them as furnaces for destroying reason, knowledge, information.
If you think of information from a ThermoDynamics perspective, it's a scarce amount of order in a universe where entropy reigns.
In the short term, in markets, prices fluctuate up and down, more or less randomly. For a century entrepreneurial economists have been trying to make sense of this data, to search for patterns in what's essentially a drunkard's walk or SelfOrganizedCriticality or EdgeOfChaos system.
How much energy had been thrown into this task of searching for patterns? For regular cycles? Or predictable probabilities of large catastrophic events?
How much study and knowledge and theory goes into constructing models? To give one NoiseTrader the edge over another? To shift risk from one place to another? How much oil burns to power computers to crunch data? To feed the people who work as traders and their supporting staff?
How much is entropy accelerated?
And for what? For a drunkards walk of prices with no hidden order.
The market is not like a particularly tricky puzzle which could be solved if you could only find the right theory. If there were any hidden order that theory could capture it would be immedietely anihilated as rival traders tried to take advantage of it.
The market is the opposite of an institution for CollectiveIntelligence. It's an institution for "CollectiveIgnorance". It sucks in ideas, theories, reasons and knowledge, and spits out mere noise. Why? Because all these ideas pitted in pointless ZeroSum competition. (As opposed to more valuable competition eg. DisputationArena or ValueOfArguing)
By how much? How much order in the world is burnt in this Moloch's stomach?
Academia vs. the Market
This is why academia and the market hate each other, of course. (LiberalBias)
Academia tries to build a collective intelligence : a tradition where one thinker's ideas are built on the shoulders of preceding giants. Where competition is constrained to be productive.
The market's competition is destructive. Today's smart buyer seeds a flock of noise traders who jump on the trend. Tomorrow they all fall off, overcompensating. Intelligence doesn't win. Not even the original smart-buyer unless he has had the foresight to sell his valuable shares before the bears take over. But he was influenced by the fundamentals that say the company was good, yet unless he plays by the rules of the noise-traders, he is punished for his insight.
Other investors know no more about the company than yesterday. Questions have been raised about the quality of its management. How could they have allowed this to happen? Noise traders have lost or won arbitrarily.
What about WikiPedia
Wikipedia is what? Academia or market? That's the crucial question. Is the collective dispute constructive or destructive?
Clearly, edit-wars, where rival opinions are simply added and deleted by their supporting factions, are as destructively pointless as the buy / sell choice.
But words are richer and more maleable. In wikipedia, ettiquete abounds. We can phrase things in a neutral point of view to remove ad-hominem implications. We can drill-down into a claim and rephrase it as a collection of sub-claims, each to be considered separately. We can try to achieve consensus. This makes it a CI institution where vigorous dispute can be harnessed for greater knowledge.
"Aha," says the market. We can do that too. Property is a richer vocabulary than you give it credit for. (OnProperty, OnSecuritisation)
Securitisation lets us drill down into various aspects of companies and discuss them individually.
In fact, don't think we didn't notice your caveat at the beginning of this piece. In the short-term the markets are noise, but in the longer term genuine trends are visible.
How are they correlated with the fundamentals? Hard to say. Clearly, over time prices follow success, the way a drunken pedestrian would more or less follow the road. But ... open questions. Does this correspond to the market doing useful information processing? Or is it just wandering and at a larger scale, defining it's own success?
If only the long term trends are meaningful, how important is the small scale stuff? Would the market be as succesful if everyone were restricted to ten transactions a week? Or to only buying and selling at Christmas?
Hell, plenty of small-scale noise and entropy goes on in the human body. Does that mean people, in the large, aren't rational?
WarrenBuffet : A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.
See also :