The price of an item is meant to convey a number of things. For many, the price of a company’s stock is meant to ‘bake-in’ all the publicly available information concerning that firms’ potential for future returns (or lack thereof) on investment. This is market efficiency…..
But the stock market also operates assuming noise. It is noise that creates uncertainty and this allows for winners and losers to emerge. For the market to exist, winners have to emerge, else there is no point playing. And for winners to emerge, some non winners also have to exist.
If you imagine that all buyers and sellers had perfect information, and all trading could be executed instantaneously and failry, there would be no stock market. In effect perfection would define everyone a winner and a loser at the same time. It is because:
- It takes time for information to be absorbed by the market, and/or
- Information itself offers asymmetrical value to the consumer
that markets work at all. This is one reason why an amateur day trader will, most often, not out perform a professional trading firm. I don’t talk about the absolute here- I refer to the most likely outcomes.
So we need to understand the time displacement and the value (assimilation) asymmetry. The former is a major technical challenge of today that can be resolved. The latter is more of a theoretical concern that is hard to agree, define, and account for.
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