Crowds and market caps

by John Quiggin on July 6, 2005

Following up Henry’s post, I happened to reread a passage from James Surowiecki’s “The Wisdom of Crowds in which he discusses the stock market’s reaction to the Challenger disaster, the crucial point being

Did you know that within minutes of the January 28, 1986 space shuttle, Challenger, disaster, investors started dumping the stocks of four major contractors, Rockwell International, Lockheed, Martin Marietta, and Morton Thiokol, who had participated in its launch? Morton Thiokol’s stock was hit hardest of all … the market was right. Six months after the explosion, the Presidential Commission on the Challenger revealed that the O-ring seals on the booster rockets made by Thiokol became less resilient in the cold weather, creating gaps that allowed the gases to leak out.”

It struck me reading this, that I’d heard of Rockwell, Lockheed and MM in many contexts, but I’d never heard of Morton Thiokol. It turns out that they are a specialist builder of booster rockets and similar items (they’re now a division of ATK).

This seems to suggest a prosaic explanation of the market reaction. Whatever the cause, the space shuttle program was going to be shut for a long time. This would do a bit of damage to everyone involved, but much more to the rocket specialist Thiokol than to the other three big diversified companies.

The ATK website indicates that they still have plenty of shuttle contracts, so it seems as if the faulty O-rings didn’t do them much long-term damage over and above the effect on the shuttle program.

I haven’t got the full book to hand and I haven’t read the study cited there , so it may be that this explanation has already been ruled out in some way, but I thought the easiest way to find it was to post and see what response I got.

Even breaks

by Henry on July 6, 2005

“Steve Bainbridge”:http://www.professorbainbridge.com/2005/07/inside_informat.html makes an interesting argument about prediction markets.

bq. On the one hand, just as Henry Manne justified insider trading in stock markets by arguing that it improved the accuracy of stock market prices, bets by knowledgeable insiders will significantly enhance the predictive power of markets like the TradeSports contracts. Indeed, given the limits on the power of insiders to affect prices in the stock market, the effect is likely to be much stronger in prediction markets, where the ratio of activity by informed traders to that of uninformed ones is likely to be much higher than in stock markets. … On the other hand, in commercial prediction markets like TradeSports contracts, the proprietor of the market presumably has an incentive to eliminate informed insider trading. If there’s a fairly high probability that you’d be betting against somebody with inside information, who thus can’t lose, would you bet? Me neither.

Bainbridge’s argument here reminds me a little of this old “post”:https://crookedtimber.org/2003/08/05/hayekian-markets-reconsidered/ of Dan’s, which argues among other things that Hayek’s notion of the market as a knowledge-creating entity sits rather uneasily with more standard economic arguments such as efficient-market theory. But Bainbridge’s argument is somewhat different and points to a different tradeoff. If you want to use markets to make the best predictions possible on the basis of available information, you’ll want to allow insider trading, which is, by definition, trading by those with valuable hidden information. But this means that you’re likely to lose liquidity by driving out ordinary punters who don’t want to be fleeced by those in the know. And without ordinary punters, insider traders have no incentive to transact (the only reason that they would want to transact is to fleece suckers who know less than they do). The only way in which this contradiction can really be resolved is if there’s a supply of suckers out there, who are willing to make bets against people who are better informed than they are. As Bainbridge points out, this is a condition that can be satisfied. But by and large, it’s only satisfied when people have extraneous reasons to make a bet (they enjoy a flutter). Bets that aren’t “fun,” or otherwise attractive in some way aren’t likely to attract suckers. Thus, they’ll have low liquidity, and not be very useful as a source of information (this seems to be borne out by the empirics; as the authors of “this paper”:http://faculty-gsb.stanford.edu/zitzewitz/Research/Five%20Questions.pdf note, “as the wonkishness of the contract rises, however, volume and liquidity falls rapidly.”) Thus, even apart from the objections that Dan and John Q. have raised in past posts, prediction markets aren’t likely to be very useful for a very wide variety of important policy issues.

A great resource

by Eszter Hargittai on July 6, 2005

There is a pointer on Lifehacker today that made me smile: an Ask MetaFilter discussion about a question regarding the use of Excel. The Ask MeFi community was able to answer the query so it proved to be useful, as it often is. Regardless, my reaction to seeing that pointer was that the person asking this question probably does not know about the ultimate resource for advice about Excel: MrExcel.com. It is THE place to search for, and if unsuccessful, to ask about advice regarding Excel. I have already blogged about it.. but looking back in my archives I realize now that it was three years ago. I think the site is worth another mention (if nothing else because now compared to three years ago there are many more people reading what I blog about).

The people on the Mr.Excel forum (not necessarily all misters from what I can tell) give free advice about using the program from the fairly trivial to the extremely complex. They will write original code for you if that’s what’s most helpful. I have had some incredibly wonderful experiences with the site getting crucial help with cleaning up some dissertation data way back when and recently while editing some spreadsheets to a more manageable format. I highly recommend that resource if you are stumped by any Excel features (or even if you are not just to see what shortcuts you may be able to dig up).

As I noted in my post a few years ago, I hope there are people studying communities like this. There seems to be quite a bit of work, for example, on the free/open source community. There is also quite a bit of work on various online communities. But I have seen little scholarship (granted, I have not looked actively) about studies of online communities that provide so much tangible value for free to active members and outsiders alike.

PS. Random observation: My initial post about Mr.Excel was on July 10, 2002 and my post last year about online communities was on July 6. I guess I like to blog about this stuff in July. I’ll leave it to Kieran to run a more systematic analysis on the topics of interest by time of year among Timberites.:-)

My latest Poorman Central Station column is up.

It’s London!

by Maria on July 6, 2005

Les rosbifs ont gagne! London has beaten Paris to host the 2012 Olympics. I’m amazed at how happy this makes me. The last two cities I lived in were London and Paris, so for a while there I couldn’t decide which I preferred for the games. Before this week, I was a firm supporter of the Paris bid, believing the city to be far superior to London in infrastructure and the centralised sheer force of will it must take to pull off this event with real panache. I thought (and probably still think) that the construction and transport hell London’s bid involve make it a painful undertaking for Londoners – but no better city to get behind every obscure new sport, every under-dog, and make it an event the whole city mucks in to, with more colour, more culture, a few sharp edges and a hell of a lot more fun.

Anonymous comment in peril ?

by John Quiggin on July 6, 2005

All around the world the problem of how (if at all) to apply campaign laws to the Internet is causing plenty of agitation. In Australia, the main problem arises from laws requiring that electoral advertisements should include the name and address of the person advertising. Usually, this means a TV ad ends with an attribution to a party functionary, spoken in a rapid monotone at the end of the slot. But a site called JohnHowardLies.com (it seems to have vanished, but there’s an archived copy here attracted a lot of attention and suggestions that it should be regulated in the same way.

I’ve just come back from an appearance before the Parliamentary Electoral Matters Committee Inquiry into the Conduct of the 2004 Federal Election and Matters Related Thereto, where I presented a submission arguing that blogs, and commenters, should not be required to identify themselves when commenting during an election campaign, using the analogy of callers to talkback radio, who are allowed to be anonymous. It was a pretty vigorous session, and some members of the Committee were clearly not convinced. So I wouldn’t be surprised to see an attempt to restrict anonymous Internet comment coming out of the Committee’s report.

My immediate analysis is that, if anonymous comments were prohibited, the only way to be safe would be to close down comments during election campaigns. Even if people gave full names and addresses, I don’t have the resources to verify them.

Anyway, it would be good to hear other views: I’ll need to think more about my own.
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