Comments on: The perils of imperfect information

By: Carnival of Personal Finance #254: Inspiring Quotes

Carnival of Personal Finance #254: Inspiring Quotes — Sat, 21 Jan 2012 19:01:48 +0000

[...] from Pop Economics presents The perils of imperfect information. The Financial Blogger from The Financial Blogger presents Is There Anything Better Than Passive [...]

By: Bender

Bender — Sat, 24 Apr 2010 18:40:29 +0000

What is truly amazing, is that any institutional investor that would alter their bet based on who was on the same/opposite side of the trade didn’t get specific confirmation of that before signing on the dotted line.

I also find it puzzling (in fact I’m somewhat dubious) that these institutions would hinge their decision on whether or not Paulson was on their side of the trade. I mean did they really think that their supposed “edge” was whether Paulson was long? If so, I would think the right answer is to either (1) not enter the trade or (2) get a commitment that Paulson was long and would stay long.

By: K Smith

K Smith — Fri, 23 Apr 2010 09:32:14 +0000

The reason that so many are sitting on the sidelines is exactly what you are describing – people now know that what they didn’t know has cost them lots of money.

People didn’t know mortgages that should have never been made were used to back large dollar volumes of securities that were far riskier than advertised. The securities were insured against loss, but they didn’t know that the insurance companies did not underwrite them accurately and did not have enough to cover the losses when they went bust, which precipitated the world financial meltdown.

There is still a lot they don’t know. I suspect that most do not know that the mortgages that backed those securities continue to languish on the balance sheets of zombie banks, and that our government is in the process of moving the debt bubble from the zombie banks to pension funds.

People now know that our financial system is much more complicated than anyone ever imagined. Even the experts don’t understand it well enough to predict what will happen.

People now know that they do not know. They know that even the experts don’t know. Given the level of uncertainty, the risk of making a bet on the market is too high.

By: Rob Bennett

Rob Bennett — Thu, 22 Apr 2010 17:41:28 +0000

Markets aren’t efficient unless everyone has all the information. Thank you for saying this, Pop. Helping people understand this is the key to getting our markets working again. The truth is that the market wants to be efficient. The market can be efficient. And we all need the market to be efficient if we are to stop our economy from going over a cliff. But the market is not automatically efficient. People need information about how stock investing really works if they are to make the decisions they need to make for the market to be efficient. The Great Sad Irony of It All is that they cannot get that information today because those who still cling to the idea that the market is automatically efficient have not been able to acknowledge their mistakes. Once they do, look out world! We are going to stage some economic comeback in this country! I very much look forward to that day. Rob

By: azmyth

azmyth — Thu, 22 Apr 2010 16:03:13 +0000

“Markets aren’t efficient unless everyone has all the information.”
The exact opposite is true. Markets don’t even exist if everyone has all the information. If those traders had all the information, they wouldn’t need to short stocks, they wouldn’t need to buy stocks. Everyone would know exactly what they were worth and no trades would ever take place. Differences in opinion, preference and information are the only reason why traders trade. Markets are an institution designed to gather information – they work best when information is distributed; when people in general know a lot, but the knowledge is spread across a large group.