--- I <d_squared_2002 at yahoo.co.uk> wrote: > --- Brad DeLong
<jbdelong at uclink.berkeley.edu> wrote:
>
> > > I was somewhat slightly bemused at the conference by the fact that my
> > usually laissez faire-loving ex-roommate Andrei Shleifer felt so very
> > strongly that the past two decades had seen a substantial degradation
> > in the quality of the information on which the marginal investor is
> > acting, and that this was a problem that required government action
> > to solve.
>
> And I think it's not so very surprising that a laissez-faire type like Andrei
> Shleifer would come to the conclusion that a massive misallocation of capital
> by a free market was the fault of a few Very Bad People who Cheated and Must
> Be
> Prevented From Interfering In The Workings Of A Basically Fine Market
> Mechanism. Explaining that everything would have been fine except for a few
> bad apples is practically an industry in itself. It's the explanation of the
> phenomenon which allows him to preserve all of his beliefs about the
> efficiency
> of laissez-faire capital markets and most of the facts. Ask him whether the
> Crash of 1929 was the fault of Jesse Livermore and the Standard Oil crowd.
>
Which was possibly a bit unfair. I picked up Shleifer's book "Inefficient Markets: An Introduction to Behavioral Finance" at the weekend, and leafing through it, it doesn't appear that Shleifer is necessarily working on a model of the world which precludes episodes like the dot com bubble being the result of an irrational panic (the book's quite good, and repeatedly credits our Brad).
So what's his theory and/or evidence which leads him to the belief that the major problem of the 1998-2000 period was that the marginal investor was being fed groggy accounts? As I can't seem to stop saying:
1) it's not the case that Amazon, MSFT, etc looked like fantastic value plays on the basis of their proforma or ex options numbers. People who bought these stocks knew they were paying wild multiples of earnings.
2) US GAAP was US GAAP, and the SEC mandates that US companies shall report US GAAP earnings. Anything else that companies give (proforma numbers, etc, etc) is basically advertising material. If Shleifer believes that financial investors can't see through hype in the stock market, what other forms of advertising would he support government action to curtail?
3) Is his belief that "the past two decades had seen a substantial degradation
in the quality of the information on which the marginal investor is acting" basically a belief about changes in the information available, or about changes in the profile of the marginal investor. In other words, is he advocating a stock market for big fish only?
i'm interested.
dd
===== ... in countries which do not enjoy Mediterranean sunshine idleness is more difficult, and a great public propaganda will be required to inaugurate it. -- Bertrand Russell
____________________________________________________________ Do You Yahoo!? Get your free @yahoo.co.uk address at http://mail.yahoo.co.uk or your free @yahoo.ie address at http://mail.yahoo.ie