Umair Haque / Bubblegeneration

Thursday, May 03, 2007

Research Note: When Economists Attack, Or Where Networks > Markets

Sometimes, economists are smart.

Sometimes, they're (deliberately) obtuse.

For example, here's Hal Varian saying:

"...Taken together, this research offers yet more support for the time-tested investment strategy of buy and hold. Anything that you think is news is old hat to the professionals. Trying to outguess the market is a sucker’s game."

Varian - of all people - should know that perhaps the biggest reason this is true is that the game is rigged against the small investor.

It's the whisper circuit between hedge funds, prop desks, and sundry other parties which helps dictate which trades get done and which don't.

To put it more bluntly, the hedge fund bubble is as much about the "syndication" (in venturespeak) or sharing of information that the average investor doesn't have - and can never get, no matter how much he's willing to pony up - between professional traders.

Needless to say, that's in complete violation of most securities laws - but since everyone but Joe Q Public is making money hand over fist in the new gilded age, regulators have turned a droolingly blind eye.

This is the dirty little secret of Wall St, and maybe, ultimately, the virus eating away the heart of global finance theory and practice - that networks determine prices as much more than markets; but where markets are level playing fields, networks are exclusion generators.

Funny how Varian - the closest thing pop-econ has to a dean - never mentions any of this.

It's also, in case you didn't notice, an absolutely killer problem for a clever entrepreneur to solve. It's the kind of information bottleneck that let's say...Google...could make billions from releasing.

In fact, let me make this opportunity crystal clear by quoting Varian again:

"...There’s an old adage on Wall Street: “Buy on the rumor, sell on the news.” Unfortunately, small investors do not seem to follow this rule."

Just imagine, for a second, the sheer magnitude of the value that would be unlocked by remedying this situation...

-- umair // 4:44 PM // 0 comments

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