STREET DOGS: Share prices don’t always reveal the entire truth
Friedrich Hayek reminds us share prices, like election results, are the result of complex processes, writes Michel Pireu
From Investors Chronicle: Friedrich Hayek said that economic knowledge is never fully possessed by a single individual, but instead consists in dispersed and fragmentary titbits across thousands of people. This, he thought, was why centrally planned economies couldn’t work. But companies are forms of centrally planned economy, too. Just as economic planners cannot know the whole ground truth, nor sometimes can managers — and certainly not outside investors. Hayek thought the solution to this was to use free markets: these, he thought, aggregated the dispersed knowledge of individuals. Prices, he thought, revealed ground truth. But this isn’t always the case. Some knowledge isn’t embedded into share prices because insider trading is illegal, because many investors are unable or unwilling to short-sell sufficiently, or simply because [some stocks] are illiquid. Markets can select not the wisest managers but the luckiest. Highly geared companies thrive when interest rates are low and t...
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