Andrew White

In “Bribing the Markets”, the Economist last week highlighted explored the impossible task of eliminating uncertainly.  The short article highlights how uncertainty is different from risk; betting on the probability of a card turning up in poker is risky business; macroeconomic analysis cannot predict all the unknown outcomes.

This article touches on some ideas that have troubled me for many years.  The only reason why our stock market works is because information theory is imperfect; in fact the market needs imperfect information and it also needs information to take its time to move through the market.  If every investor knew everything that was important to a decision, on a timely basis, and all other things being equal*, the market would leave no room for vagaries and profit at someone else’s expense could not accrue.  The fact that information is imperfect and slow to make the rounds is what makes the market move.  So any effort to change this can have dramatic ramifications on market dynamics.  I wrote about this issue 10 years ago at the height of the .com bubble when e-Marketplaces where promising such changes.  It didn’t make sense to me then – it doesn’t make sense to me now.

Which reminds me of a book I read a while ago that came to be from off the beaten path.  I read this in December 2007: More than you know: Finding financial wisdom in unconventional places, Colombia, 2007, Michael J Maubboussin.  This was my book review at the time: 

If you liked “Freamonomics”, you will love this.  Maubboussin is chief investment strategist at Legg Mason Capital Management.  This book goes someway to explain the various theories you can draw on to understand – and perhaps predict – how individuals behave as well as crowds – within the stock market.  Maubboussin draws on psychology, innovation and competition theory, as well as complexity.  He nicely draws out the non obvious conclusions from what would obviously have led to incorrect conclusions.  The book it littered with examples, often quoted in the Economist and other such journals.  One lovely example repeats the finding of a survey of horse-race handicappers: researchers asked handicappers to predict race results with 5, 10, 20, then 40 pieces of information about each horse.  Though the accuracy of the results improved very slightly, even falling off in some scenarios, the confidence of the handicappers increased as more information was shared.  In other words, information – the amount of it – may not be as important as you think to support decision making, but it sure could make you feel much better about the process.

Back then I was not scoring books when I did my review; I added that later.  But on reflection, based on the fascinating insights I gleaned from the book, I would not give it a “9 out of 10”.

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Category: Economy Information Theory Uncertainty     Tags:

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