Yes. Definitely. Bad information can (and does) persist for significant periods—up to several years. (e.g., the late 1990’s stock bubble, of which I had painful firsthand experience). It just doesn’t persist forever.

Not entirely true. There are several studies that show that bad information does in fact persist (not eternally, but for quite meaningful periods). Plus, people with bad information and people with good information were initially argued with neoclassical economics to eventually all converge on the good information, but there are several more studies that show that’s not the case either (again, for meaningful periods).

I think you have two statements that explain one another, but you aren’t making the connection clearly.
Derivatives transactions are given indefensibly different treatment from a regulatory and accounting perspective from trades in the assets that underly them.
I’m not sure I’d agree with the “indefensibly”—this is true in GAAP, IASB, and insurance statutory accounting, so there might be a reason—but it’s true. It is a subset of a larger issue; that is, the relationship between accounting and reality is fairly arbitrary. This arbitraryness enters in everywhere, and it causes the second issue.
Reported earnings follow the rules and principles of accounting. The results do not always create measures consistent with underlying economics. However, corporate management’s performance is generally measured by accounting income, not underlying economics. Risk management strategies are therefore directed at accounting rather than economic performance.
The second sentence is key, and is basically what I stated above: the relationship between accounting and reality (economics) is arbitrary. Everywhere, risk management strategies are aimed significantly at accounting performance (they generally focus on economic risk some, but in my experience accounting risk is much more of a focus.) That makes sense, given that the relationship of accounting to reality is arbitrary, but perceptions are driven by accounting. You can end up with a vicious cycle quite easily—people perceive a business to be in trouble, due solely to accounting (the underlying economics haven’t changed), so they stop buying from it/lending to it, and then the business is in trouble. That is a reasonable risk to avoid, and the arbitraryness of the accounting code makes it generally avoidable.
However, the relationship between accounting and reality is not entirely arbitrary; long-term, a business needs to make money to stay in business. Thus, there is a significant amount of effort expended, by funders of businesses, to determine whether reality and accounting are roughly in sync.

You ask if the commodification of information doesn’t lead to a market/bubble in feel-good information, and if that’s been studied by libertarians. I don’t know of any studies from a political perspective, but the economic perspective is that feel-good information is not reality-based, and so is unlikely to persist. It may be widely held and used temporarily (and those temporary delusions can cause a great deal of harm), but it will eventually be disproven by experience.

It’s kind of like those high-schoolers who surround themselves with flatterers (thus living in a bubble of feel-good information). Eventually, they encounter reality.

See my next post for an example in the business world.

Stop being stupid.

Hey, look who’s talking. If that’s what you meant by the word “incentive”, you definitely weren’t clear about it, and in any case “incentive” is commonly used to refer only to positive motivations, not negative ones—so indeed in many people’s minds “incentives” does mean “bag full of cash which I use to run to Brazil with”.

Of course, both positive and negative motivations can influence behaviour. But besides providing rewards and punishments for good and bad behaviour, one also needs to be able to detect bad behaviour when it occurs, to ensure that those who should be punished will be punished.

It was perhaps unfortunately phrased, but not on its face absurd, especially if you regard it as a critique of agency problems:

Many executives are paid primarily through stock options. Option value increases with volatility. Ergo by ratcheting up leverage and taking high-volatility risks, those managers increase the value of their compensation. This is a danger for equityholders if it’s out of line with the firm’s historical performance and the increased volatility catches investors by surprise. It’s a danger for debtholders if they’ve been surprised by it. It’s a danger for line employees in that it may fail.

As a note, this isn’t intrinsically a bad thing – risk-taking is at the heart of capitalism, and in an environment of proper disclosure, where the firm is clear to shareholders about what it’s doing, investors as indivuduals can diversify away most of the risk if they see fit. We should encourage smart risk-takers and we should discourage firms that shrug and simply accept that “it’s a mature industry” and they can’t push the envelope any further.

I dunno whether that’s what abb1 meant or not, but “juvenille rant” seemed a bit much.

However, while that’s true, it doesn’t really describe the entire situation. Investors (both institutional and individual) never knew what precisely Enron’s business model was and how Enron made money (or didn’t). Enron was always extremely resistant to having anyone investigate their business. Enron released extremely limited data.

These things should have made investors more cautious (or at least worried that owning Enron equity was not where they wanted to be in Enron’s capital structure). Instead, it seems to have made Enron more attractive to investors, not less.

Ezra Zuckerman-Sivan’s studies on security analysis (check his website on the MIT Sloan school website) list many appropriate articles in his bibliographies.

there are implicit dabs towards what i am asking about on this thread, but no clue where i should go to follow it up properly

So what?

Stop being stupid.

Read my earlier comments. It is clear that my use of the term “incentives” includes penalties for misconduct or negligence.

So my answer is that we do in fact provide incentives not to steal, those incentives being jail terms for thieves.

What counts as success in the corporate world? It’s exactly the opposite, it’s the potential for speculation, stock price volatility. They get or re-price their stock options when the stock is low and sell them when it’s high, boom and bust, boom and bust. And they love it: this stock is about to take off – buy, buy! it’s overvalued now – everybody sell, sell! But buy it again when their stock hits the bottom! And once company stabilizes and becomes mature, no one wants it anymore – that’s a failure to them.

This juvenile rant does not merit a response.